Questions to Ask When Deciding Income Options in Retirement

Running out of money during retirement is a common fear for those close to retirement.  Finding the perfect income amount during retirement is different for every individual.  By answering some questions pertaining to income and expenses, the difficult task of income planning can be made simpler.

Some questions that a person thinking about retirement, whether in 40 years or 4 years, include:

  • How much income will be needed for retirement?
  • How long will the retirement income last?
  • Is the retirement income distributed to ensure a safe return?
  • What are the costs associated with managing retirement income?

The answer to these questions are not readily available, and anyone who is saving for retirement, entering retirement, or just worried about their retirement should seek to find answers.

Income Needed

The first question to answer when planning retirement income is the amount of income needed.  To answer this question, the best place to start is with the expenses.  A potential retiree’s expenses during their career should include retirement savings.  However, during retirement, this expense will not be included.  Other types of career expenses that are not needed during retirement include payroll taxes, commuting costs, and particular clothing expenses.  This can add up to several thousands of dollars per year that will not be needed during retirement.

Another key is to analyze actual spending.  Many people think they know what they spend every month, but are surprised to find out that these amounts are very different from what they thought.  Take the last 3 months of credit card and bank statements and categorize spending on a worksheet.  Some banking and credit card services allow customers to categorize their spending online making the process quick and easy.  

Other expenses that may change after retirement are housing and travel expenses. Many retirees find that they want to downsize their home and travel more.  Since housing can be very costly, even without a mortgage, decisions regarding housing should be considered carefully.  Extensive travel can also take a large chunk of retirement income, so preplanning for these types of expenses is necessary.

Health care can become a colossal expense that leaves many seniors short of funds during retirement.  Supplemental healthcare coverage expenses are a wise expense to consider to avoid a catastrophe.  

Income Timeline

How long income will last is another question many retirees should consider.  Systematic withdrawals on savings, changes in income, and inflation costs are all factors that can lengthen or shorten the length of time money will be available for expenses.  

Longevity of life is another consideration when looking at how long income will be needed.  Currently, life expectancy in the U.S. for males and females is 84 and 87, respectively.  That equates to 20 to 25 years of retirement for an average retiree.  If Social Security is the only income a retiree receives, they will more than likely be living below the poverty level.  Longevity risk is a critical factor is the decision-making process and execution for any retirement plan.

Income Safety

Financial stress is one of the major health issues for a large section of retirees.  To relieve this stress, follow this simple rule:  Subtract a person’s current age from 100 to find the percent of the money that should be invested in riskier markets that may be more volatile.  The closer a person is to retirement, the more difficult it will be to recover from market losses.

A mix of stocks and bonds is advisable to many major financial companies.  A balance between several factors such as years until retirement, current age, and the amount of risk to take will determine the distribution percentage between stocks and bonds.

A low-risk option that often realizes more income than a CD or savings account is an annuity.  Annuities can be confusing to many people, so finding a knowledgeable financial advisor is necessary.

Income Cost

The cost of withdrawing income during retirement can be factored into a retirement plan.  Strategic plans should take into consideration factors such as income needs, tax consequences, inflation, Social Security benefits, 401K/IRA income, pensions, and other investment vehicles.

For example, a 401(k) with a 1 percent a year fee adds up to over $70,000 lost during a four-decade working career.  This is equal to working three extra years before retiring.  To complicate the issue, the fees related to this type of retirement savings can be mired in dense and complex fund statements.

Check higher fees especially if the funds are trying to beat market indexes with actively bought and sold securities.  A smarter investment option would be index funds that typically charge lower fees.

Finding Answers to Retirement Income Questions

Finding the best expert to help with retirement income questions is critical so that costly mistakes are not made.  There are many websites that claim to help retirees with their retirement savings, but few of these “experts” have the experience or knowledge base to effectively manage such an important task.  Check the credentials of any retirement professional before allowing them to manage your retirement.

An investment advisor may be well versed in asset allocation and mutual funds and adequate for someone in the midst of their career.  But as retirement approaches and the complexity of generating retirement income nears, an expert who is experienced and knowledgeable in annuity income, drawing down investment assets, Social Security income, and overall retirement distribution is needed.  

Finding an advisor who charges a flat fee rather or hourly rate rather than a percentage of assets under management will assure that all investment options are revealed.  Since annuities are not subject to charges, an advisor who operates under a percentage fee may be inclined to stay away from annuities.

To create the best scenario for a long and happy retirement, answering the four questions of retirement income must be taken seriously.  How much income is needed, how long it will last, how safely income is invested, and the costs related to retirement income are important questions that should be discussed in detail with an expert?  This will help to create the best scenario for a retiree.    


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