5 Steps to Get Your Retirement Income Plan on Track
How much can you afford to spend each year of retirement? Will your savings last as long as you do? What if your needs or the markets change? Without a plan, these questions are tough to answer.
“But with some planning, you can set up a sensible, sustainable retirement income stream that can be adjusted over time,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research.
Here are five steps to help you put your retirement income plan in place.
Step 1: Estimate your expenses
Once you retire, some costs—such as commuting and retirement contributions—will go away. But others—such as health care and travel—are likely to increase.
Rob recommends creating a detailed budget to itemize all your retirement expenses. It should include essential expenses, like food, health care, and housing, as well as nice-to-have expenses, like entertainment, travel, or a new car every few years.
“Planning ahead for health care costs is especially important, since they tend to go up in retirement,” says Rob. “Most retirees can expect to spend about $450 to $600 a month on routine health care.”
If you expect some major one-time expenses—such as home improvements, relocation, or gifts—be sure to factor those in, as well.
Step 2: Calculate your retirement income
After you calculate your retirement expenses, you can start to determine if you’ll have enough income to cover it all.
First, add up the income you expect to have from predictable sources, like Social Security, a pension, a rental property, or an annuity. Then, subtract that amount from your estimated expenses to determine how much retirement income you’ll need from your portfolio (including your 401(k), IRAs, and other retirement or investment accounts).
For example, let’s say you need $90,000 a year to cover your expenses. If you plan to get $40,000 a year from Social Security and a pension, you’ll need to pull another $50,000 from your portfolio.
Step 3: Determine your withdrawal rate
Once you know how much retirement income you’ll need from your portfolio each year, you can determine whether that withdrawal rate is sustainable.
According to the Schwab Center for Financial Research, if your portfolio is roughly 25 times the amount you’ll withdraw in your first year of retirement, you can reasonably expect it to last 30 years—even after adjusting your withdrawals for inflation each year. If you plan to withdraw $50,000 in your first year, this means you’ll need a portfolio of $1.25 million ($50,000 x 25), assuming a 30-year retirement.
“While the 25 times rule can give you a useful estimate, remember it’s just that—an estimate,” Rob says. “Make sure you build in some wiggle room for emergencies and other potential increases in your expenses.”
Step 4: Adjust as necessary
If you find your current savings are out of sync with your required portfolio balance, there are several ways to bring your savings—and aspirations—in line:
- Increase your savings: If possible, make sure you’re contributing the maximum to your 401(k) account—which in 2020 is $19,500, plus an additional $6,500 if you’re over age 50—and consider funding a separate individual retirement account (IRA), as well. You might also consider earmarking bonuses, raises, and tax refunds for retirement.
- Consider delaying retirement: Every extra year you work can help your retirement savings grow. Plus, if you work until you’re eligible for Medicare, you can avoid paying for private health care coverage. Waiting to collect Social Security can also help stretch your retirement savings. Once you reach full retirement age—between 66 and 67 for today’s retirees—every year you wait to collect (up to age 70) increases your benefit by 8%.
- Reassess your expenses: If your retirement budget includes nice-to-haves, like dining out, travel, or other non-essential purchases, consider reducing or delaying these costs. “That doesn’t mean you have to cut out all the fun stuff,” Rob says, “but it helps to know how much of your budget is flexible in case you need to make a change.”
Step 5: Plan for the unexpected
As you move through retirement, you may find your income or expenses fluctuate from year to year, requiring you to spend more or less than you planned. Likewise, market volatility may necessitate a change to your withdrawal rate to help extend the life of your retirement savings.
“Changes are inevitable,” says Rob. “But you can better navigate the ups and downs by creating a plan early and revisiting it often. Regular monitoring for both your plan and portfolio can help ensure you’re on track, and allow you to adjust more quickly if you’re not.”
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