Do I have enough money to retire? It’s a common question people ask their financial advisors or planners. However, it isn’t quite the correct question to ask, in my opinion. The correct question should be, “Will I have enough income in retirement?” It’s a subtle but significantly different question.
There are four primary sources of income once you retire. Not everyone will have access to every source. The trick is to maximize the income you have from all of these sources while minimizing the income taxes you pay.
- Social Security: Most people who have worked will be eligible to draw on Social Security once they “retire”, which means in Social Security parlance that they submit to draw their Social Security. Most people know the drill: You can draw at age 62 but at a lesser amount until you reach Full Retirement Age (FRA), which is a sliding scale upward based on the year you were born. My FRA is 67. If you were born prior to 1960, Google it if you don’t already know your FRA. I recommend you wait until FRA to file unless there are extenuating circumstances such as poor health.
- Retirement Savings: IRA, 401k, 403b and the like. If yours are Traditional retirement accounts, remember that the money you draw will be taxable at ordinary income levels when you draw them, because you contributed to these accounts from your pre-tax money and any growth in these accounts will have been tax-deferred. You don’t need this money and you certainly don’t want to pay taxes on it and you want to pass it on to your heirs? Sorry, you can’t do that because of the Required Minimum Distribution rules that kick in at age 70.5. You can, however, meet your RMD requirement by donating to charity, which is the subject of a future blog. Instead of Traditional retirement accounts, you have Roth accounts, then you were already taxed on the money you contributed so they aren’t ordinary income when you draw on them.
- Pension: Perhaps if you have worked for the government or at a school, or at an older, probably large corporation, you have vested in your employer’s defined benefit pension plan. These are highly regulated by the IRS and the Pension Benefit Guaranty Corporation and so you will be well-informed as to how much you will be entitled to and how and when to file for it. Many people keep working solely to maximize their pension benefit, which is a good thing because it keeps people working in their most productive years in terms of salary. However, in the new economy, these types of plans are not prevalent because of the “defined benefit” nature of them. Defined Contribution plans such as a 401k are more the norm now.
- Additional Non-Retirement Savings: This is income that you generate from the assets you own, including your home. The trick is to transform your portfolio into income-generating assets. Own a diversified portfolio of stocks that pay dividends. Government bonds don’t pay a lot these days, but take a look at corporate bonds or corporate bond funds. Real Estate Investment Trusts generate tax-advantaged income. Own rental property, and outsource the property management if you don’t want to be a landlord during retirement. Save money by downsizing your home – there are tax breaks available to do so. Your ability to optimize income from your assets could be the make-or-break for you for your retirement comfort.
Planning for retirement income should be an important objective for everyone. I strongly recommend you work with a Financial Planner such as me because a professional, competent third party should be better able to optimize your retirement income and transform your retirement into something to look forward to instead of something you dread because you don’t think you will have enough money to retire comfortably.