Many people approach retirement with a combination of personal savings, 401(k) funds and other investment accounts, also expecting to collect Social Security. Ideally, you start and maintain a portfolio of diversified assets and have multiple streams of income, including fixed sources and annuities that continue to grow over time.
Especially as you approach your 60s and think about retiring, consider the following factors.
1. Know How Long Your Money Will Last
Take into account your existing assets and budget, then make a plan bearing in mind:
- Your assets should last 30 to 40 years, depending on when you intend to retire.
- You can start withdrawing from a 401(k) after age 59 ½.
- You can start receiving Social Security checks at age 62 but will see a larger payout if you wait until the current full retirement age of 67. Otherwise, you will have reduced payout and other potential penalties.
- If you stop working before you’re eligible for Medicare at age 65, know how you will pay for health insurance.
2. Manage Your Sources of Income
As you approach retirement age, know when you can start withdrawing from your accounts without penalty and think about using funds along a 30-year timeline. Otherwise, you risk going through your money at a faster rate and quickly depleting your retirement accounts.
Some people abide by the four-percent rule, adding up their investments and withdrawing four percent of this total during the first year of retirement, then adjusting the amount each year to account for inflation. To determine the best approach for you, it’s important to seek the advice of a financial advisor to build a retirement income plan.
It’s common to start building retirement income from the following sources:
- A 401(k): A type of defined contribution plan, a 401(k) lets you start withdrawing your funds penalty-free after age 59 ½. You are required to start taking minimum distributions after age 73.
- Social Security: Many people supplement their retirement accounts with Social Security payments.
- Pension: For workplaces that offer pension plans, these benefits often kick in at age 65. Not all plans use the same structure, so understand if you’ll receive one large amount or monthly checks.
- Investment Accounts: Outside of employer-sponsored contribution plans, know when you’re required to start making minimum withdrawals from IRAs and other investment accounts. While you can follow the four-percent rule, you’re still advised to continue investing your money, albeit in a more conservative way. Specifically, many people shift their portfolio from primarily stocks to bonds between 65 and 75.
To protect these sources from market risk, allocate your money to more conservative investments and away from stocks and mutual funds. Consider a financial consultation to review all available options.
3. Create a Budget
Once you’ve calculated your income in retirement:
- Know where your income is going. Many people use their retirement income to pay for a mortgage, healthcare expenses, food, car insurance and home or car repairs.
- Understand that you may need to cut back on expenses to make your money last longer. Some people move into lower-cost housing, downsize to a smaller house or shop around for insurance plans with lower premiums. Also think about reducing costs related to eating out and entertainment.
- Don’t forget to create an emergency fund for retirement. Aim to save at least a year’s worth of income to have money available for unexpected events.
As you plan for retirement, better manage your savings accounts and begin to diversify your investments. To learn more about our products and plan for your future, contact Ion Bank.