Sustainable Income Strategies in Retirement Program Recap

Thank you to Larry Metzler from the Society for Financial Awareness for closing out our Money Smart Week programming by discussing types of income that can help you in retirement.  Having the right types of income in our retirement can help us ensure that we enjoy a comfortable retirement, even if we live longer than expected.  These income sources should be able to sustain us at various points in our retirement, respond to changes in the market or world events, and cover increasing costs of medical care as we age.  So what are these strategies and how do we apply them…let’s find out!

Successful Retirement = Preparation

The keys to a successful retirement are planning and preparation.  By having a sound financial plan in place, you can help ensure your retirement goals are met, that your money will last for the duration of your retirement, and you are able to sustain yourself during periods of economic unrest.  While making your preparations for retirement (the earlier, the better), be sure to address the following concerns:

• Longevity – The average life expectancy in the United States is over 85; can your retirement money last that long?  Do you need to delay retirement or supplement your early retirement income by working?
• Higher Prices – Generally, you should plan for expenses to increase by about 3% each year and the cost of living is often tied to the cost of fuel.  Can your retirement money outpace inflation?
• Rising Medical and Long-Term Care Costs – It costs roughly $4,300 per month for assisted living care and over $7,000 a month for private/semi-private rooms at a nursing home.  If you are living at home, it can cost about $25 per hour for a home health aid.  Can your retirement income meet your medical demands?
• Possible Changes in Social Security – While it is unlikely that Social Security will disappear completely, it is possible that Full Retirement Age may be extended or payouts will be reduced, perhaps down to 70 cents of what the dollar is worth today.  Can your retirement plan absorb a decrease in Social Security payments without having to sacrifice quality of life?
• Investment Risks – While the stock market can be volatile, it can generate good returns over the long run.  Bonds are tied to the interest rate so when interest rates are high, bonds payouts can be lower.  Does your retirement plan account for investment risks and do you have the right asset allocation to respond to fluctuating market forces and world events?

It is never too early to start planning for retirement, even if that means starting by creating an emergency savings fund.  A good habit to get into is to use any money that was once being used to pay off a debt to fund a savings or retirement account once that debt has been paid off.  If we don’t use that money properly, it might just get sucked into the black hole of our lifestyle; we’ve survived without it so why not make the most of it.

Strategies for Sustainable Income

Sustainable income through proper planning is key to a happy and comfortable retirement.  So what are some of the strategies we can use to make sure we have the right amount of cash flow throughout our retirement?

Identifying Sources of Income

There are different income sources that can be used at different periods of your retirement to fund your lifestyle.  In early retirement, you may wish to work full or part time to lessen your reliance on retirement accounts.  You can also rely on pension payment or Social Security to get you set up early in retirement.  These are steady and guaranteed sources of income that will not change as you age.

Later in retirement, you want to start looking at IRA withdrawals, real estate, and 401k withdrawals as more significant sources of income.  If you can act as a landlord with property that is debt free, it can be a very lucrative source of money.  In regards to retirement accounts, after a certain age, you may be required to take yearly distributions; taking out too much too quickly can drain those accounts and eventually they won’t be able to keep pace with inflation and other rising costs.

Choosing the Best Withdrawal Rate

We often think of retirement accounts and other sources of income without strings attached.  The money is there, so we should use it.  However, many retirement accounts are tied to rates of return on the investments, which is what grows the money in that account.  As mentioned in the previous paragraph, if you take money out at a faster rate than it can replenish itself, eventually you will be out of money.

It is currently recommended to take out funds equal to 3-4% of the total amount of your retirement account annually.  While dependent on the account type, this can help with making sure your money is still growing despite inflation and ensure that your money will last for the entirety of your retirement.  For example, a withdrawal rate of 3% may mean your account can last for 50 years; double it to 6%, and that account may only last 16 years.

Consider a Bucket Approach

Think of your retirement plan as a bucket; you want to try and fill it with as many different things as possible; also known as asset allocation.  You want to be able to meet your short-term, mid-term, and long-term financial goals when planning for your retirement:

• Short-Term Income – income that can be used immediately and without tax implications.  For example, cash, CDs/Money Market, short-term bonds, immediate annuities.
• Mid-Term Income – should be a mix of growth and income vehicles that can both replenish your short-term income as guard against market volatility.  These include bonds, deferred annuities, absolute return funds, and asset allocation/balanced funds.
• Long-Term Income – should be used as a hedge against inflation and focus on the longevity of the investment and used later in retirement.  These include growth-based stocks/funds, real estate, and commodities.

Managing Risk

The best way to manage risk is to be diversified so that you are not significantly impacted when there is an economic downturn, an asset class loses value, or issues within a specific sector.  Your retirement plan should be consistently evaluated to make sure that you are meeting your financial goals and best prepared for expected and unexpected situations.

Addressing Specific Risks

Specific risks are often tied to world events or changes within a specific asset class or sector.  For example, the conflict in Ukraine had a world-wide impact on fuel costs, causing inflation to rise and dollar to lose some of its value.  Should there be a conflict with Taiwan, that may affect the world supply of semi-conductors, which would have an adverse effect on stocks and funds tied to the tech and automobile sectors that rely heavily on semi-conductors.  Being aware of world events and working with a financial profession to prepare for significant changes can help reduce the impact of changes to your portfolio.

A Roth IRA as a Tax Strategy

A Roth IRA is a type of retirement account that allows your money to grow tax-free and offers tax-free withdrawals in retirement.  A nice way to utilize this to your advantage before retirement is to make contributions to the account based on your tax bracket.  If you would enter into a higher tax bracket, you can take that money and move it into a Roth IRA to shield it from being taxed.  Consult with your financial professional or a tax preparatory service before making any decisions to ensure you are following the law.

More Information

If you have any questions, please feel free to contact Larry Metzler at lmetzler@metzlerlaw.net or schedule a free, no-obligation appointment at https://calendly.com/lmetzler-1/60min.  You can view a recording of the webinar on our YouTube channel at https://youtu.be/6nNunPeSup0.  You can download a copy of the The Lifetime Sequence of Returns: A Retirement Planning Conundrum white paper at https://www.njstatelib.org/wp-content/uploads/2021/12/Sequence-of-Returns-Risk-White-Paper.pdf.