Making Your Money Last

Need a Retirement Income Plan? Here's Where to Start

If you're wondering when you can retire, how much you need to save and where your money should come from in retirement, what you're really trying to do is come up with a retirement income plan. The basics boil down to asking yourself four questions.

Any seminar you attend, program you watch or article you read about preparing for retirement is bound to mention the importance of setting goals.

It’s the starting point for any kind of financial planning, but it isn’t as simple as it sounds. Everybody wants to be “comfortable” and to feel “secure.” What that means, though, is different for each of us. And drilling down to the details can be daunting.

Because income is everything in retirement, it’s a great place to begin. Here are four things to think about as you set your income goals:

1. At what age do you hope to retire?

If your high school reunion was held this weekend, and everybody was talking about their retirement plans, how would you answer that question? (I guarantee you, it would come up.) It’s not a bad idea to try to anticipate what age you’d like to retire, but there are several factors to keep in mind.

If you decide to retire early — before age 59½ — you probably won’t be able to access some of your assets (money in a 401(k) or IRA, for example) without paying a withdrawal penalty. And, of course, your Social Security benefits won’t be available until you turn 62.

At 62, you can turn on that Social Security income stream — but you’ll receive up to 25% less than you would if you waited for your full retirement age (based on your birth date, that’s age 66 or 67).

You’ll also want to consider your spouse’s age. Remember, Medicare doesn’t kick in until you turn 65. If you and your spouse both stop working, you’ll likely lose any employer-sponsored benefits, so you’ll be paying for essentials like health, dental and life insurance out of your own pocket.

2. How long do you expect your retirement to last?

Americans are living longer — and that’s a wonderful thing. But it also means your retirement could last 20, 30 or even 40 years.

According to data from the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.3. And a woman turning age 65 today can expect to live, on average, until age 86.7. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

That’s a long time to have to stretch out your savings. And it’s why when our office does a financial plan, we run it to age 100 — just to be on the safe side.

Look at your own health and your family history. If you expect to live a long life, you’ll have to figure out how to pay for it. Which means you’ll want to consider. …

3. What are your expenses going to look like?

Everyone’s priorities are different. You might want to travel in retirement. Or not. You might want to join a motorcycle club. Or not. OK, probably not. The point is, the things you spend your money on may change, but you’ll still have expenses — and you can and should put together a preliminary budget to figure out how much you’ll need to live the lifestyle you want.

People think their costs will go way down in retirement, but that isn’t always the case. You’ll have more time for the fun stuff: hobbies, going out to eat and to museums, movies or ballgames. Few of those things are free.

You’ll also likely see your health care costs rise as you age. And if you need long-term care, you could spend $4,195 a month or more for a home health aide, or $7,441 for a semi-private room in a nursing home.

Inflation also will come into play. The items in your first-year retirement budget won’t cost the same amount when you’re in your 10th or 20th year. And Social Security’s cost-of-living adjustments (COLA) are notoriously inadequate, especially when it comes to keeping pace with key expenses, such as prescription drugs, utilities and rent. If you decide you can manage on $60,000 a year, for example, you’ll need more than $80,000 10 years later (based on a 3% annual inflation rate).

Maybe you’ll have enough saved to cover the difference. Or not. So the question becomes. …

4. How much can you accumulate before retiring?

You may have heard the term “retirement income gap.” It’s the difference between your retirement income (combining all your expected income streams) and your actual expenses.

If you haven’t retired yet, you can make adjustments to help deal with a projected shortfall — by working longer, saving more, making changes to your portfolio and/or other strategies. But once you retire, that becomes much more difficult. You might have to cut your expenses — downsizing your dream lifestyle. Or you might have to go back to work.

Which means you really don’t want to be winging it as your big day draws near.

Make a plan — now. Try choosing the age you think you’d like to retire and back into it, taking into consideration what you have, what you’ll need, the rate of return you’ll require from your investments and how you can maximize sources of guaranteed income, such as Social Security, employer pension or an annuity.

Take the time to really think about what being comfortable and financially secure means to you. And find the products and strategies that will get you there.

Then set another goal: to monitor and update that plan every year or so.

Kim Franke-Folstad contributed to this article.

About the Author

Jason Mengel, CFP

Co-Founder, Fusion Capital

Jason Mengel, originally from Atlanta, Ga., currently resides in Isle of Palms, S.C. He holds a CERTIFIED FINANCIAL PLANNER™ designation and is a member of the Financial Planning Association. Mengel graduated from Wofford College in Spartanburg, S.C., with a B.A. in Finance.

Most Popular

Refunds for $10,200 Unemployment Tax Break to Begin This Month
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Month

The IRS will start issuing automatic refunds sometime in May to people eligible for the unemployment benefit tax exemption.
May 1, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
10 Dividend Growth Stocks You Can Count On
dividend stocks

10 Dividend Growth Stocks You Can Count On

What should investors prioritize in dividend growth stocks? A history of aggressive payout expansion, and the ability to generate enough cash to keep …
May 3, 2021


Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021
The Benefits of Working Longer
Empty Nesters

The Benefits of Working Longer

Delaying retirement for a couple of years—or even a few months—is the most effective way to improve your retirement security.
April 29, 2021
Biden Hopes to Eliminate Stepped-Up Basis for Millionaires
Tax Breaks

Biden Hopes to Eliminate Stepped-Up Basis for Millionaires

As part of his American Families Plan, President Biden wants to change the way capital assets are taxed when you die.
April 28, 2021
Veteran Financial Advice to the NFL's New "Overnight Millionaires"
Brandon Copeland

Veteran Financial Advice to the NFL's New "Overnight Millionaires"

As the NFL Draft looms, contributing editor and NFL linebacker Brandon Copeland offers guidance to those about to receive a boatload of …
April 26, 2021