Retirement income planning: How to get started

Open full sized image

Work through the uncertainties and retire on your terms.

© Garun Studios, BillionPhotos.com, Iakov Kalinin/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.

If you’re like a lot of people, you have no interest in outliving your money, and you probably don’t want to work until the day you die. The good news is that retirement income planning can help you avoid both predicaments. It’s the glide path to comfort in your golden years.

If you’re new to retirement income planning and don’t know where to begin, don’t worry. By breaking the process down into steps, you can make it more manageable and build a plan to meet your needs.

Calculating your retirement income can feel like a daunting task with too many unknown variables to track. But you can get some clues from things you do know.

Use your current lifestyle as a guide. If you plan to pay off your mortgage before you retire, you might have fewer living costs, but health care expenses typically rise as you get older. Research the cost of living where you plan to spend your retirement years. A retirement calculator (see below) can help you estimate how much you need to save—over and above any expected income streams such as Social Security and perhaps a pension—to meet your retirement lifestyle goals.

Start early. The longer you’re invested in a tax-advantaged retirement account, the more you can look to see in compounding returns later.

Start by setting aside a small amount with each paycheck, or transfer a small amount into a retirement account each week. If you get a raise or a bonus, be sure to share some of it with your “future self.”

In general, a retirement plan is a tax-advantaged account that allows you to invest for the future. Qualified retirement plans include 401(k) plans, individual retirement accounts (IRAs), 403(b) plans, and a few others.

Traditional retirement plans allow you to take a tax deduction when you contribute, which reduces your current taxable income. The contributions to your retirement account are allowed to grow over time with no taxes taken out in the interim. Eventually, when you take distributions from the account, you’ll pay taxes at your then-current rate. Most qualified plans require you to wait until you’re at least 59½ before you begin taking distributions. Otherwise, with a few exceptions, you might be subject to a 10% penalty on top of any taxes.

Another type of qualified retirement plan is the Roth version of some accounts. If you have a Roth 401(k) or Roth IRA, you make your contributions with after-tax money. The investments you make grow tax free, and when you withdraw money in retirement, you won’t owe taxes on those distributions.

Your Social Security benefits can help you with your retirement income planning. Just keep in mind that, ideally, Social Security should be a supplement, not a mainstay of your retirement income. Monthly benefits depend on how much money you made in your lifetime and paid into the system—but also when you choose to begin receiving benefits. If you wait until full retirement age (67 for most people born after 1960) to collect, you get your full benefit amount. You can choose to start receiving Social Security earlier, but your benefit will be reduced. If you put off receiving monthly payments until later, your monthly payout will be larger.

Deciding when to start Social Security depends on your life expectancy, other retirement income, tax rates, and whether you plan to work after your benefits begin. This video provides a general overview for considering when to start drawing Social Security. But if your tax or retirement income situation is complex, you may want to consult with a financial advisor.

Retirement planning isn’t a one-and-done task. It requires continual refinement as you move through retirement. The good news is that once you’ve established your plan, the bulk of the work is done. But to ensure you stay on track, review your plan at least once a year and adjust these items as necessary:

Retirement income planning involves several key steps to ensure a stable income in your later years. Start by estimating how much you’ll need to retire comfortably based on your current expenses, anticipated lifestyle changes, and expected health care costs. Using a retirement calculator can help you set savings targets tailored to your retirement goals.

If your employer sponsors a retirement plan, build your savings with payroll contributions to a tax-advantaged account such as a 401(k). Consider increasing your contribution—either by a dollar amount or a percentage of your pay—with each raise. If your employer doesn’t have a plan or you’re self-employed, look at opening and contributing to an IRA. If a Roth option is available, you may want to consider whether it’s a better option than a traditional retirement plan. Roth plans are advantageous if you anticipate being in a higher tax bracket in retirement. Contributions to a Roth plan are made with after-tax dollars, so your withdrawals in retirement will be tax free.

Also, review your Social Security benefit to determine how much of it you’ll need to supplement your retirement income and when to begin taking payments. Finally, aim to review your plan yearly to adjust for lifestyle changes, market performance, and tax law changes to ensure your retirement plan stays on track. And with that, you’re off and running.