After you retire, you’ll likely face a number of challenges, and having your finances squared away can help ease your mind. Here are some steps to consider taking today to help give yourself a solid financial future.
Estimate your income floor
The key to funding your expenses is to determine your "income floor." That’s the minimum guaranteed income you’ll need to cover your most basic expenses. Then, if you find a way to always keep that amount of income available, you won’t worry about running out of money, no matter how long you live.
How to determine your income floor:
1. Identify your essential living expenses. Estimate your must-have living expenses for each year of retirement. Things like food, shelter, baseline healthcare coverage and insurance. Total up the monthly costs of each expense category. These are the costs that you’ll need to cover as long as you live.
2. Estimate your Social Security and pension income. Social Security and pension plans are considered to be guaranteed sources of income. It’s important to develop a plan to get the most from them. Start with Social Security, which is your foundational income. Look at a recent benefits estimate — available on the Social Security website — to determine your approximate benefit.Your spouse/partner should also do the same. Your monthly payment will depend heavily on when you start taking withdrawals. In general, the longer you can hold off receiving Social Security, the larger your monthly payout will be. Run a similar analysis for any pension plans you may have.
Add Social Security and pension benefits together to determine how much monthly income your household might receive.
3. Fill your income "gap." If your Social Security and pension income won’t cover all your essential expenses, you have a financial gap that you’ll need to cover. Take steps now to save more, work longer, or both.
Considering an annuity
You may also consider a source of guaranteed income in retirement, such as an annuity. Annuities are retirement products that allow you to convert a lump sum of money into a steady stream of payments that last as long as you live. Annuities are quite different than other retirement savings options because if you choose an available lifetime income option, the payments never "run out."1
A note about using your retirement savings
You'll most likely need to use your retirement savings over time, too, but there are several different ways to do so. Many people expect to simply withdraw funds from their IRA, 401(k) or 403(b) accounts to cover their monthly expenses. But that approach carries real risks.
The value of your retirement savings will likely rise and fall over time, especially if you have some portion invested in stocks. If your balance drops substantially due to a sharp bear market, continuing to withdraw the same percentage of your portfolio could eventually leave you short.