How to create your retirement income plan with confidence.
Whether it’s coming soon or still years away, you may find yourself dreaming about retirement. Perhaps you’ll travel, spend time with family, volunteer more.
You review your statements from your 401(k), 403(b), IRA or other retirement accounts when they arrive. And for the most part, you feel good about the direction you’re going. But then you catch a news clip about the market fluctuations, and you see the corresponding impact on your investments. You begin to wonder if you’ll really be able to retire when you want.
Whether you’re a few years from retirement or a few decades, it may be time to switch gears from simply planning for retirement to planning for income in retirement.
“When I start talking with a client about retirement, the first question I ask is: When do you want to retire? Then I ask: Do you want market conditions at that time to drive your decision?” says Clark Krueger, Thrivent Wealth Advisor in Glendale, Arizona. “If together we do the right work upfront, you should be able to make that decision to retire on what you want your lifestyle to look like, not on what’s happening in the world.”
There are essentially five steps that you, with tailored guidance from your financial advisor, can take to plan for income in your retirement.
1. Paint your retirement picture
This is the beginning step—what do you want to do in retirement?
“This is where we dive into your goals,” Krueger says. “We’ll talk about your desire to travel, your hobbies that take cash flow, your kids and grandkids, your volunteer work.”
Will you want a part-time job? Do you have legacy goals? Charitable goals?
“I want to encourage you to not think about money at this point,” Krueger adds. “This is about what you want your retirement to look like. What do you want to do?
Todd Yeiter, director of Advisor Support and Alignment at Thrivent, refers to this step as defining your needs, wants and wishes. While needs are essentials like food, shelter and clothing, wants and wishes are different for everyone. Wants may include dining out, gifts, recreation and travel. Wishes may include special events or purchases or a vacation home.
“Knowing what falls into these three categories can help your financial advisor know what you hope to accomplish in retirement and be able to offer up solutions geared toward your personal goals,” he says.
2. Assess your finances today
It’s important to get a handle on your current expenses. “You’ll want to figure out what will change and what won’t when you retire,” Yeiter says.
There are lots of “rules of thumb” on what you’ll spend in retirement. For example, the 80% rule says in retirement you’ll need about 80% of the income you had when working.
“But in reality, this amount can vary widely depending on your situation,” he says.
You’ll also want to review how much you’ve already saved, and how you’re saving it. Are the savings tools you’re using taxable, tax-deferred or tax-free? It makes a difference.
If together we do the right work upfront, you should be able to make that decision to retire on what you want your lifestyle to look like, not on what’s happening in the world.
3. Identify the derailers to your retirement plan
These are the things that could derail your retirement plan quickly, and often without notice. “A health issue that requires you to be off work could take you off plan,” Yeiter says. “Or maybe you’ll experience a job layoff in your 50s. Or income tax changes. Or market volatility.”
Healthcare and long-term care costs, as well as taxes are among the biggest concerns for people in retirement.
“We should expect these things to happen, and we should plan for them,” Krueger says.
4. Seek guaranteed income sources in retirement
A well-designed retirement plan can incorporate a wide array of products to help meet future needs. These may include mutual funds, individual stocks and bonds, managed accounts, life insurance and annuities, among others.
“Having a plan in place is the real key and should incorporate a mix of investments, tailored to your needs and life circumstances,” says Tim Vander Pas, vice president of Annuity Products at Thrivent. “But there still is a level of risk that a particular product’s returns will vary from those projected.”
That’s why it’s essential to have guaranteed income sources. Social Security and defined benefit pension plans are two of the most well-known sources of guaranteed income. Yet, pension plans are decreasing in availability and there’s continued stress on the future of Social Security, Vander Pas says.
“Because of that, products designed to provide guaranteed retirement income become most important,” he says. “Annuities, for example, are the only products designed specifically to offer a tax-advantaged approach to meeting this need in providing a guaranteed lifetime income stream.”
Options in many variable and indexed annuities often can add guarantees through enhanced lifetime withdrawal benefit features, he says.
“With deferred annuities, the products are designed to provide guaranteed income in the future when you choose to receive it,” Vander Pas says. “Immediate annuities, on the other hand, are used to convert other assets you’ve accumulated into guaranteed income streams beginning now.”
You always have to adjust with the market, or you could wipe out your portfolio.
5. Weigh the different retirement strategies available
There are three basic approaches to address retirement income needs, says Bill Idzorek, vice president, Advisor Support and Field Development at Thrivent.
Systematic withdrawal approach.
This is a popular approach but has a higher market risk. “You always have to adjust with the market, or you could wipe out your portfolio,” Idzorek says.
The approach takes in guidance from research that indicates 4% annually over a 30-year period of time is a safe withdrawal rate without depleting your portfolio.
“Hypothetically, if I have $1 million, I could likely draw up to $40,000 for 30 years based on normal market returns,” Idzorek says. The upside is that it’s a longer-term investment; if the market goes up, there’s more money to spend. The drawback is market volatility’s impact.
“Imagine if you had retired on March 1,” he says. “That’s the big risk people face with this strategy; the risk that the markets will go down early in retirement.”
When considering this approach, work with a financial advisor to review potential drawbacks including the possibility of running out of money during your lifetime. Additionally, the effects of income taxes, expenses and fees of the portfolio should be considered with the systematic withdrawal approach.
In this strategy, you set up three buckets of investments for different time horizons. The first, invested in safe, stable cash accounts, is for the near-term, covering your expenses for the first year. The second bucket, which holds assets for five to 10 years, gives you growth potential. And the third bucket is long-term investments.
“The upside to this strategy is that people can understand what they’re putting in each bucket,” Idzorek says. “The downside is how to make it work over time. As you empty out one bucket, when do you refill it? While a logical plan, it requires a lot of decision-making.”
Flooring strategy or essential vs. discretionary spending strategy.
This strategy uses guaranteed income sources to cover your essential expenses.
“You prioritize your spending goals between things that are needs—such as rent and utilities—or wants, such as travel or luxury items,” Idzorek says. “The income for your needs would come from a secure source.” The rest is invested for greater growth potential, which does carry a greater risk.
“The upside of this strategy is that it resonates with people who are more risk averse and want security,” he says. “The downside is when buying secure retirement income, you give up returns and growth potential for the safety.”
“At Thrivent, we recommend the flooring strategy,” Idzorek says. “We believe the upside outweighs the downside. However, it doesn’t mean this strategy is right for everyone.”
None of these is perfect, he says. “All have pros and cons. You need the facts, and then working together with your financial advisor, you can tailor a plan that fits your specific needs.”
How Thrivent can help
Thrivent financial advisors have retirement income planning tools that can help you achieve financial clarity. Tools include:
• IncomeMatch®: This assessment tool will help you identify your investor profile and see what allocations of guaranteed, liquid and long-term assets might be right for you.
• MoneyGuidePro®: This interactive and collaborative financial advice tool can help you understand your current financial situation and trade-offs, and identify strategies and solutions that you can feel confident about.