Running out of money in retirement can be one of the scariest scenarios for seniors – in fact, 87% confirm this fear. Efficiently spending down a nest egg can be difficult, especially with unpredictable tax rates and rising inflation. Social Security helps many seniors close the gap on their monthly income needs, but even that is expected to exhaust its trust funds by 2034 under current laws.
It’s reported that Social Security benefits will be cut by 22% by then. Of course, adjustments will be made, just like an adaptive financial plan. Since nothing is set in stone, retirement planning is still a crucial step for assisting savers in maximizing the capital they’ve spent decades accumulating. We are here to support you through a positive, productive process!
Of course, there are two different skill sets involved with retirement planning – saving for retirement and spending in retirement. The mindset of building wealth is different from the one you’ll need to adopt to preserve wealth in retirement. But how much should you spend each year in retirement, and from what sources should that income be drawn?
Ready to organize your monthly retirement funds? A financial advisor in Norman, OK, can help you work on long-term retirement goals.
Retirement Income Planning
According to the Federal Reserve, US savers’ median retirement account balance was a mere $65,000. Even the most frugal consumer will struggle to make $65,000 last more than a couple of years in retirement.
So what’s a cost-conscious saver to do? Starting early is the best course of action. The more time you have to fund your retirement accounts and let compound interest work its magic, the less risk you’ll need to take with your cash later in life.
But as retirement approaches, you’ll need to position your portfolio in an ideal manner to draw down your assets efficiently. And since you can’t control market returns or inflation rates, you need to focus on what you can control – minimizing taxes and keeping discretionary spending under control.
Taxes and inflation are the two sworn enemies of the fixed income retiree, so you need to have a plan for dealing with both.
Guaranteed Income Sources
When setting a monthly retirement income, you’ll need to consider all sources of capital at your disposal because some should be drawn down before others. Here are the income sources to which you can affix some guarantee.
A lifeline for many seniors, Social Security, is a government program that supplies income for retirees. Your Social Security payments are pegged to inflation, but you’ll pretty much receive the same amount each month for as long as you live. However, since Social Security benefits are based on your full retirement age, the longer you wait to take it, the more you’ll receive each month.
For example, taking Social Security at age 66 (if you were born from 1943 to 1954) means you will receive 100% of the full monthly benefit. But if you wait until age 70 to tap into the benefits, your benefits percentage increases. Determine your full retirement age here and use the chart to determine your eligibility.
If you’ve maximized your tax-advantaged retirement accounts, another form of tax savings can come from annuities. Annuities can be fixed or variable, but a fixed rate multi-year annuity can provide tax savings and steady income throughout retirement for a guaranteed return.
Are you the restless type? Retirement doesn’t have to mean a complete cessation of work. Many retirees pick up side jobs during their golden years like consulting, freelancing, or even gig economy jobs like Uber or DoorDash.
Just don’t forget to set aside some of your earnings for taxes.
Variable Income Sources
The following sources can’t guarantee your income on a year-to-year basis, so you must plan accordingly. Use these accounts in conjunction with your guaranteed income sources to create a tax-efficient retirement spending plan.
Market returns are outside of anyone’s control, so the balance of your retirement accounts can fluctuate due to market gyrations. Since contributions to these accounts are made with pre-tax dollars, you’ll need to consider your tax obligations when drawing down these accounts.
Note: You also must begin taking RMDs at age 72, so these accounts must be used efficiently.
Roth 401(k) or IRA
A Roth IRA is one of the best retirement savings vehicles available to Americans today. Instead of an upfront tax break like a traditional IRA, a Roth IRA is funded with already taxed dollars, and the investments in the account grow tax-free. A Roth IRA can be a great income gap-filler before taking Social Security benefits.
Health Savings Account (HSA)
Medical costs can be a considerable burden for retirees if not planned for properly. Unfortunately, the aging process comes for us all, and most retirees will experience at least one serious medical event. An HSA can help lighten the load of medical expenses since funds placed in these accounts won’t be subject to taxes if used for qualified medical costs.
Numbers for Oklahoma Residents
Good news for Oklahoma retirees: Out of the 50 states, OK ranks 19. And according to the World Population Review, Oklahoma is second only to Mississippi when it comes to the average annual income needed for retirees per state.
On average, retirees who want a comfortable living can expect to spend $54,019 per year while residing in Oklahoma. Divide that by 12, and you’ll get a monthly average income of about $4,500.
The average life expectancy of an Oklahoma resident is about 78.5 years. A person retiring at age 65 can expect to live about 13–14 years in retirement, which would require a nest egg of about $723,000 if you spend the average annual amount.
Of course, no two people are the same, and your lifestyle, family history, and retirement goals can change this number drastically. Even if you’re a frugal saver with a good idea of how you wish to handle retirement, this isn’t a process for a DIY experiment. Always consult with a financial advisor to ensure you have a retirement income plan that suits your needs and goals.
Live comfortably in your golden years with a sound plan to back your cost of living and well beyond. A dedicated investment advisor who provides comprehensive financial planning is in order. Contact us today to schedule a meeting to learn more about us, as we learn more about you.
Don’t forget to download our helpful eBook on Diversification! Give us a call – we look forward to hearing from and supporting you very soon!
TRAC Advisor Group Inc. is a full-service, fee-based financial advisory firm in Norman, OK. We offer independent investment advice and help people withstand any type of market volatility with confidence.
As an independent investment advisor, we can offer alternative investments like numismatics and precious metals to diversify and hedge against uncertain times. With a straightforward and direct planning style, you can trust that we’ll keep you on track towards your financial goals.