For most of our working lives, we know exactly how we get paid. We go to work, receive a paycheck, pay taxes and bills, save some money and spend the rest.
Then retirement arrives, and the paycheck often disappears.
That makes retirement one of the few “jobs” people take without knowing exactly how they’ll be paid, how much they can spend or how long their money needs to last.
Yet many people still focus primarily on reaching a particular savings number, assuming that once they hit it, they’re ready to retire.
The reality is that there is no magic retirement number. What matters more is having a plan for turning your savings into sustainable income that can support you throughout retirement.
Start with your income floor
Before retiring, determine how much income you’ll need to maintain your lifestyle. This is your retirement income floor — the amount needed to cover your essential expenses and the lifestyle you want to maintain.
Start by looking at what you spend today, including household expenses, insurance, transportation, food, entertainment and housing. Then consider expenses that might become more significant in retirement, such as travel and healthcare.
As you age, you might need more frequent medical care, hearing aids, home healthcare or long-term care. You could also face major home repairs or need to replace a vehicle.
Once you have a reasonable estimate of your monthly expenses, compare it with your expected retirement income from sources such as Social Security, pensions and your retirement accounts.
Does the math add up?
If your essential expenses exceed your predictable income, you need to address that gap before retiring.
Build a retirement paycheck
Accumulating assets and creating retirement income are two different financial challenges.
During your working years, the goal is generally to save and invest for growth. In retirement, the focus shifts toward distributing those assets in a way that supports your lifestyle without prematurely exhausting your savings or overpaying in taxes.
Investment portfolios, dividend-paying stocks and real estate can all play important roles in a retirement strategy. But relying entirely on market performance to pay your monthly bills can leave you vulnerable when markets decline.
Creating a dependable income floor can provide greater stability. Social Security, pensions and certain guaranteed income products can potentially provide predictable income that continues throughout retirement.
When reliable income covers essential expenses, your investment portfolio might have more flexibility. You don’t necessarily have to sell investments if the market is down and you need money to pay the electric bill or buy groceries.
Instead, your investments can have time to recover while also providing money for discretionary goals such as travel, hobbies and other experiences.
Don’t underestimate what can drain your savings
Healthcare is one of the most obvious threats to retirement savings, but it’s not the only one.
Believe it or not, one expense that often gets overlooked is generosity.
Retirees might feel obligated to help adult children or grandchildren with a car purchase, mortgage problems, debt or other financial emergencies.
Helping family is admirable, but every withdrawal from your retirement savings reduces the money available for your own future and the potential for the money to continue growing.
Before giving away a significant amount, consider how many years your retirement savings might need to support you. Protecting your own financial security isn’t selfish; it’s part of responsible retirement planning.
Time spending around your lifestyle
Retirement spending isn’t constant. Many new retirees spend more during their early years. They travel, play golf, dine out, visit family and finally have time to pursue the activities they’ve delayed.
Later, spending patterns could change as people become less active, while healthcare and long-term care costs can become more important.
That’s why a retirement income strategy shouldn’t simply assume you’ll spend the same amount every year. Instead, consider how your lifestyle and expenses might change throughout retirement and build a distribution strategy around those different stages.
Don’t retire with just a number
Ultimately, the goal of retirement planning isn’t to accumulate the largest possible portfolio. It’s to create enough reliable income to enjoy your retirement without constantly worrying about running out of money.
Before retiring, ask yourself three questions:
- How much will I need?
- How much predictable income will I have?
- How will I fund the gap?
Retirement is a new job, and unlike your previous jobs, there will be no employer providing a paycheck. Creating that paycheck yourself is one of the most important steps you can take to make your money last as long as you do.
Related Content
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
