Retirement planning is about more than reaching a certain account balance.
As retirement approaches, the focus often begins to shift from accumulating money to understanding how the different pieces of your financial life may work together over time.
A retirement plan can help organize those pieces and provide a clearer picture of where your income may come from, what expenses you may face and what decisions may need to be made along the way.
So, what should a retirement plan include?
A retirement plan begins with understanding what you want retirement to look like.
Some people hope to travel. Others may want to spend more time with family, relocate, pursue hobbies or simply maintain their current lifestyle.
Questions to consider may include:
Your goals provide the foundation for many of the financial decisions that follow.
Knowing what retirement may cost is an important part of planning.
Some expenses may remain relatively predictable, while others can change considerably over time.
Common retirement expenses may include:
It can also be helpful to distinguish between essential expenses and discretionary spending.
Understanding the difference can help you determine how much dependable income you may want available for the expenses that matter most.
Most retirees do not rely on a single source of income.
Retirement income may come from several places, including:
Each source may work differently.
Some may provide predictable payments, while others may fluctuate or require decisions about when and how much money to withdraw.
A retirement plan can help you understand how these different sources may work together.
For a broader look at coordinating different sources of retirement income, read CDA’s Creating Retirement Income That Lasts.
Social Security can be an important part of retirement income for many people.
The age at which you begin receiving benefits can affect the amount of your monthly benefit. Your retirement timing, other income sources, financial needs and individual circumstances may all be relevant when considering when to begin benefits.
Rather than viewing Social Security by itself, it can be helpful to consider how it fits with the rest of your retirement income.
During your working years, much of the focus is often on accumulating money in retirement accounts.
Once retirement approaches, a different question becomes important:
How will I use the money I've accumulated?
Withdrawals from 401(k)s, IRAs and other retirement accounts may provide income throughout retirement.
The amount withdrawn and the timing of those withdrawals can affect how long those assets may last.
Taxes, required minimum distributions when applicable, market conditions and other considerations may also influence withdrawal decisions.
One question to consider is how much of your regular retirement expenses you would like supported by predictable sources of income.
Social Security and pensions may provide part of that foundation.
For some people, an annuity may also be considered as a way to create an additional stream of income.
Certain annuities can provide income for a specified period or, depending on the contract and income option selected, for life.
Annuity guarantees are subject to the claims-paying ability of the issuing insurance company, and contract terms, liquidity provisions and benefits can vary.
Retirement planning is not only about creating income.
Maintaining access to money can also be important.
Unexpected healthcare expenses, home repairs, family needs or other circumstances may require funds beyond normal monthly income.
A retirement plan may therefore include both sources designed to generate income and assets that remain accessible for future needs.
The appropriate balance between income and liquidity will depend on individual circumstances.
Healthcare can become an increasingly important expense during retirement.
A retirement plan may consider:
Because healthcare costs can change over time, they may deserve separate consideration when estimating future retirement expenses.
Retirement can potentially last decades.
Over that period, the cost of goods and services may increase, affecting purchasing power.
A retirement plan should consider not only what your expenses are today, but also how those expenses may change over time.
Different sources of retirement income may respond to inflation differently, which is another reason diversification among income sources may be important.
Not every source of retirement income receives the same tax treatment.
Withdrawals from certain retirement accounts, Social Security benefits, pensions, annuity payments and other income may be taxed differently depending on individual circumstances.
Taxes can therefore affect the amount of retirement income actually available to spend.
Tax considerations can be complex, so individuals should consult an appropriate tax professional regarding their particular circumstances.
Retirement planning may also include thinking about what happens to your assets after your death.
Beneficiary designations on retirement accounts, annuities and life insurance policies can play an important role in determining how assets are transferred.
It is a good idea to review beneficiary designations periodically, particularly after major life events such as marriage, divorce, the birth of a child or grandchild, or the death of a beneficiary.
Estate-planning and legal considerations should be discussed with an appropriate legal professional.
Even a carefully developed retirement plan cannot predict everything.
Financial markets, interest rates, healthcare needs, family circumstances and personal priorities can change.
Keeping some flexibility in your plan may make it easier to respond when circumstances change.
A retirement plan does not necessarily need to remain unchanged for the rest of your life.
Your income, expenses, health, family circumstances and priorities may evolve.
Reviewing your plan periodically can help you understand whether your current strategy still reflects your needs and goals.
Major life events can also provide a good reason to revisit the plan.
A retirement plan is ultimately about coordination.
You may have Social Security providing one portion of your income, retirement accounts providing another, savings available for flexibility and potentially pensions or annuities providing additional predictable income.
The goal is to understand what each resource is designed to do and how the different pieces may complement one another.
A thoughtful retirement plan can provide a clearer picture of the resources available to you and the decisions you may face throughout retirement.
Retirement planning is not simply about answering:
How much money have I saved?
It is also about asking:
How much income might I need, where might that income come from, and how can my resources support the life I want to live in retirement?
At CDA of America, we believe understanding your options is an important part of making informed financial decisions.
For decades, CDA has worked with individuals, families and businesses to help them better understand insurance, retirement and financial strategies designed around their goals and priorities.
Have questions about retirement planning or retirement income strategies?
This material is provided for educational and informational purposes only and is not intended as investment, tax or legal advice. Annuity guarantees, income payments, features, withdrawal provisions and other contract terms vary by insurance carrier and product. Guarantees are subject to the claims-paying ability of the issuing insurance company. Withdrawals or distributions may be subject to applicable taxes, surrender charges and other contract provisions. Consult appropriate financial, tax or legal professionals regarding your individual circumstances.