Section 01 How much do I need for retirement?
According to a recent survey of consumer finances by the Federal Reserve, the average 65- to 74-year-old has roughly $426,000 saved for retirement. Is that enough? Well, it depends entirely on your situation.
To answer the question about how much you’ll need in retirement, you need to get a sense of what you want to do after you stop working and what that might cost. Essentially, you need a retirement budget. Do you envision downsizing your home? Or are you planning to buy a second place? Will you spend your months traveling? Or are you planning to stay closer to home and volunteer your time?
Ultimately, how much your retirement will cost will depend on how much you spend each year — and how many years you spend in retirement. From there, you can begin to work backward to get a sense of how much you might need to retire.
Once we have a sense of what you might need, it’s important to look at your entire financial picture as we build a plan for how you’ll generate income. Let's look at common retirement income sources as well as some common risks that can threaten your retirement nest egg.
Section 02 Common retirement income sources
If you’ve been saving for retirement for many years, you likely have investments, which are a great way to grow your money over time. But as you approach retirement, you may find you want additional financial options to diversify your sources of income. Using a diverse set of savings plans can help you better manage risks — like market volatility, taxes and inflation — to your retirement income over time. Properly managing these risks can help you get more out of your retirement savings.
Here are common sources of income in retirement:
Whether you have traditional brokerage accounts, a 401(k), traditional or Roth IRAs or some other account that gives you access to investments, there’s a good chance these stocks, bonds and other investment vehicles will be a key part of the retirement savings that you tap to generate income. These investments can help your savings benefit from compound interest and keep up with inflation, which are two key factors for getting the most out of your retirement savings.1
Unlike investment accounts, Social Security is a guaranteed source of income. The size of your monthly check will depend on a number of factors including when you begin taking Social Security. You can begin to take Social Security when you’re 62. However, doing so will lock in a reduced benefit for life. You’ll get 100 percent of your benefit if you’re able to hold out until your full retirement age (FRA), which is 67 for those born in 1960 or later. If you can wait longer, your benefit will increase by 8 percent every year from your FRA until you turn 70.
Income annuities represent another form of guaranteed income. They’re purchased from an insurance company, typically with some portion of your retirement savings. With an annuity, you’ll receive guaranteed monthly payments that usually last for as long as you live.2
Pensions have become much less common over the last few decades, especially in the private sector. Pensions also provide guaranteed income in retirement. They are typically offered by an employer or a group such as a trade association. The structure for payouts will vary by employer.
Permanent Life Insurance
Most people think about the death benefit first when they think about life insurance. But a permanent life insurance policy also accumulates cash value. In many cases, the cash value of permanent whole life insurance is guaranteed to grow. The guaranteed growth of permanent whole life insurance can make it a unique tool to help you supplement your retirement income.3
Just as you need to have an emergency fund during your working years, liquidity is equally important in retirement. If a pipe springs a leak or an appliance breaks, you’ll be happy to have the ability to quickly access cash to cover immediate expenses. It’s a good idea to have access to about two years' worth of cash or other liquid assets (such as the cash value of a retirement policy) in retirement.
Section 03 Risks to retirement Income
If you knew that markets were always going to increase, generating income with your investments would be stress-free. If you knew exactly how long you would live, it would be easy to know how much to withdraw from your savings each year.
In reality, variables such as market volatility and your own longevity pose risks to your retirement income. The good news is that when you use a range of financial options, you can mitigate the impact some common risks like these can have on your savings. We’ll take a deeper dive into how to plan for these risks shortly, but here’s a quick checklist of potential situations that could impact your retirement income:
Inflation and taxes
Health care costs
Section 04 Planning for longevity
If you know exactly how long you’ll live, it would be much easier to plan your income in retirement. But no one knows what the future holds.
According to the CDC, the average life expectancy for a 65-year-old man is nearly 83. Women who are 65 live to be 85 on average. That is, of course, good news — you have many years to enjoy life without being tied to work. And that’s just the average. Many people live even longer. And that’s the risk.
What happens if you live a very long life? Will you deplete your savings too soon? Or will you spend less than you might otherwise in the early years of retirement because you aren’t sure?
This is where income annuities and other guaranteed streams of income enter the picture. When paired with Social Security (and a pension if you have one), income annuities can help you create a guaranteed stream of income that will last for as long as you live — even if that’s a very long time. Consider it a strong foundation for a comfortable retirement income.
Using guaranteed income
Many people use guaranteed income from annuities and Social Security to provide enough income to cover essential living expenses like food and utilities.
Section 05 Weathering market volatility
Investments are an important part of retirement income because the growth they can offer over time is critical to keep up with rising prices (which is another risk we’ll get to). But the potential upside of investments comes with a well-known downside: Markets are volatile.
There’s a decent chance that you’ll experience several market corrections and a bear market or two during your retirement. If the majority of your savings are invested, you may be forced to sell stocks during a downturn to generate income for your living expenses. Doing so can take a large bite out of your savings, as you’ll have fewer stocks to recover when the markets tick back up.
This is where the more stable parts of your financial plan come into play. Social Security and annuities are guaranteed and will continue to provide you income through a downturn. Meanwhile, a cash reserve and the guaranteed cash value of permanent whole life insurance can help you create the income you need. This allows you to maintain your lifestyle while you wait for your stocks to recover.
Using market fluctuations to your advantage
A market downturn is often a buying opportunity. By rebalancing your portfolio during a downturn, you have the opportunity to reap additional gains when the markets recover. This can help your plan keep up with inflation over the long term.
Section 06 Planning for inflation and taxes
Staying ahead of inflation in retirement
Inflation is a reality over time. That means that the amount you can buy with a dollar in the first year you retire will decline. It’s natural to want to keep your money safe once you retire, but too much safety can also devalue your nest egg because of inflation. The best way to plan for inflation is to keep a portion of your retirement savings invested. Investments have historically been one of the best ways to grow your money over time.
Getting more out of your savings
When you have the stability of permanent life insurance cash value and an income annuity, you may be able to be more aggressive with your investments without taking on more overall risk. This can help you get more out of your savings over time.
Managing taxes in retirement
Taxes are also a major consideration when you’re approaching retirement or are already there. Just like inflation, taxes can eat away at your nest egg over time if not managed properly.
How different accounts are taxed in retirement
Traditional qualified accounts
If you have savings in a 401(k), IRA or similar plan, that account has been funded with pre-tax dollars. That means you didn’t pay tax on the money you saved and haven’t owed tax as it has grown. But once you take the money out in retirement, you’ll owe ordinary income tax on your distributions. And once you reach age 72, you will be required to take minimum distributions (RMDs) and pay tax.
A Roth IRA or Roth 401(k) also has tax advantages, but those contributions were made after being taxed. That means the money you withdraw in retirement is tax-free.
If you have a health savings account, that money went in tax-free and can be withdrawn tax-free for qualified health care expenses.
If you have a taxable investment account, gains are taxed at the capital gains rate, which is less than the highest income tax rate.
When it comes to state tax, only 13 states tax Social Security income. They are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Federal taxes on Social Security are based on income thresholds. For example, if you’re an individual whose income exceeds $34,000, up to 85 percent of your benefit will be taxed. (That number jumps to $44,000 for married couples filing jointly.)
Annuities are taxed based on how you funded them. If you used qualified dollars (from an IRA or another qualified account), your payouts are taxed as ordinary income. If you contributed after-tax dollars, only a portion of your payout (the growth of the annuity) is taxed.
You can withdraw the basis that you paid into a life insurance policy tax-free. If you withdraw any amount over that, you will owe ordinary income tax. However, you could borrow against the growth of your policy without owing tax (as long as your policy stays in place).4
Being strategic about withdrawals
When you have a diverse range of financial options, you can be more strategic about your withdrawals to reduce your tax burden. For instance, you could withdraw from taxable accounts until you get to a higher tax bracket. Then, you could switch to withdrawing from non-taxable accounts for additional money in a given year.
Section 07 The importance of planning for health-related expenses
The cost of health care and the potential of needing long-term care at some point in retirement can be big-ticket variables that will affect the amount of money you will need. That’s why it should be something you consider when planning for retirement.
Planning for health care expenses in retirement
This can be a big expense in retirement, especially if you retire before qualifying for Medicare. However, Medicare doesn’t cover everything. Hearing, dental and vision expenses are excluded, and you’ll still be on the hook for deductibles and other costs — including premiums. Doctors’ services alone, which are covered under Medicare Part B, will set you back at least $148.50 per month.
Planning for long-term care needs
People don’t want to imagine themselves or their spouses developing a prolonged health issue, but it’s something to think about when retirement planning. If you end up needing in-home care or transitioning to a nursing home or assisted living facility, will your savings be robust enough to cover the expense? If not, the burden could fall to your loved ones, as most long-term care costs are not covered by Medicare. The cost of long-term care exceeds $50,000 per year, according to data from the Long-Term Care Group.
Section 08 The importance of legacy planning
Legacy planning goes hand-in-hand with long-term wealth management. If you have a goal to leave something behind, a legacy plan can help you be more deliberate about achieving your goal.
Being intentional about your plans can make for a more comfortable retirement. Otherwise, you might create an overly restrictive income plan out of fear that you’ll deplete assets you’d otherwise like to leave behind. Others may overspend and have little left over for their own long-term care needs, which can create a financial hardship for loved ones. Deliberate planning allows you to strike the right balance.
Permanent life insurance can be a valuable resource. In addition to the access to cash value to supplement your retirement income, the lifetime death benefit is often the center of a legacy plan.
Section 09 Making the emotional transition into retirement
Retirement planning is often centered on income. While that’s certainly vital to a successful retirement, it can be easy to focus on money while overlooking the emotional impact that tends to accompany such a major life transition. It can be an especially big consideration if you and your spouse are retiring at different times.
Whether you and your spouse are retiring at the same time or different times, it’s important to have conversations early and often about the transition. Make sure you’re on the same page about your vision for each other’s retirement.
There are social and mental health factors at play as well. Stepping away from your career after working for decades can be a huge adjustment that affects your sense of identity and purpose. Below are some key questions to ask yourself as you enter this next phase of life:
Does your partner’s retirement timeline match yours? If not, how will that impact your ability to live the life you want in retirement?
When you’re no longer working and spending time with coworkers, how will you maintain nourishing relationships?
What kinds of activities do you have planned to satisfy your curiosity, creativity and talents? Keeping up with meaningful hobbies, passions and interests can also help give you a sense of purpose in retirement.
Conversation starters with an advisor
Your retirement savings target should be shaped by your unique goals and financial situation — but setting yourself up for a comfortable retirement is often best achieved by having a healthy balance of income sources. Here are some questions you may want to ask an advisor.
Are my savings on track for the retirement I want?
How can I build options into my retirement plan?
How can I get the most out of my Social Security claiming strategy?
Is my investment portfolio positioned the right way for retirement?
What should I consider beyond investments for my retirement?
How can I protect my retirement against market risks?