Planning for retirement: How to balance your retirement income and expenses
Retirement could last 20+ years. Learn ways to balance your retirement income sources against your living expenses.
Most people in retirement plan to draw income from several sources. Even if you receive guaranteed income from both Social Security and a pension, it may not be enough to cover all your expenses and support your lifestyle. You may also need to draw on your savings, investments and supplemental retirement income sources to generate income.
Government and guaranteed retirement income sources
Personal retirement savings and supplemental retirement income sources
Do you have a strategy for withdrawing the money you need? Social Security and pensions may provide a fixed amount every month, but you'll need a plan to make the most of your other assets throughout retirement. Consider working with a financial advisor to develop the right strategy for you.
Timing when you withdraw money can have a significant impact on the taxes you pay.
The order in which you withdraw money also matters. While everyone's needs are different, the general guideline for tax-efficient withdrawals is:
- Taxable accounts first
- Tax-deferred accounts next
- Tax-free accounts last
This order may vary based on your individual goals and tax bracket, so it's wise to consult a financial advisor.
Once you have the timing and order for withdrawals down, you'll need a plan for generating cash flow while keeping some assets growing. Your financial advisor can show you how to provide retirement income using three basic elements:
- A cash account for day-to-day money
- A short-term reserve to cover emergencies and generate consistent income
- Long-term assets for potential growth
A cash account is your primary access point for day-to-day money. It provides a convenient way to manage your income and expenses. Typically, a cash account includes checking, savings or money market accounts. Most assets in this category are liquid, so you can draw from them at any time without loss or penalty.
Short-term cash reserve
You'll also need short-term assets to serve as a cash reserve and create consistent and predictable income. Short-term assets are investments that generally have guaranteed principal, such as:
- Certificates of deposit (CDs)
- Treasury bills
- Mid-term assets such as bonds
As these assets mature, the money may be moved to your cash account. This way, your short-term cash reserve can serve as a reliable source of income for several years, regardless of how your long-term investments are performing.
The third element is long-term assets. Their primary goal is to provide growth that will help meet your financial needs throughout retirement as well as help build assets for your legacy. You may also draw from long-term assets to create income, which can be transferred as needed to your short-term reserves or directly to your cash account.
Long-term solutions may include:
- Stocks and bonds held individually or in mutual funds
- Fixed and variable annuities
- Real estate and real estate investment trusts (REITs)
- Hedge funds and commodity investments
- Life insurance cash value
When you begin drawing on your assets, it's critical to remain aware of the effects of market volatility and inflation. Placing some of your assets in bonds and other fixed-income vehicles can help reduce your portfolio's overall volatility, and mitigate the impact of inflation and stock market downturns.
With careful planning, your sources of income should be enough for a long, comfortable retirement. But if your expenses are more than you expected, or your investments haven't performed well enough, you may need to bridge a gap between your costs and income.
While it's impossible to predict the future, there are tools that can help you make a reasonable estimate of how long your money will last. For example, by plugging your numbers into a retirement planning calculator, you can see how long your money will last in thousands of possible market scenarios. If you find that your money might run out too soon, you may need to make some adjustments.
- Find lifestyle expenses that you can cut. Keeping an expense diary can help you evaluate your current expenses.
- Consider shifting money from low-interest savings accounts into investments such as long-term bonds that pay higher interest rates — if you are comfortable with the additional risk.
- Reduce your mortgage and living expenses. Downsizing to a less expensive home or area can help you save on taxes, maintenance and other costs.
- Go back to work, at least part-time, to earn extra income and enjoy the benefits of remaining active.
- Consider a reverse mortgage, which allows you to borrow against the value ("equity") built up in your home if you are 62 or older. For more information about evaluating a reverse mortgage, read Reverse Mortgages: Avoiding a Reversal of Fortune, published by the Financial Industry Regulatory Authority (FINRA).
Using a variety of investments, an Ameriprise financial advisor can help you turn your assets into a stream of income that is designed to last throughout retirement. This includes choosing appropriate investments for your cash reserve and long-term assets, as well as setting up a central cash account for your day-to-day expenses.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
Like real estate, REITs are subject to illiquidity, valuation and financing complexities, taxes, default, bankruptcy and other economic, political or regulatory occurrences.
Commodity investments may be affected by the overall market and industry- and commodity-specific factors, and may be more volatile and less liquid than other investments.
Hedge funds are designed to be low or non-correlated to traditional equity and fixed-income markets with a long-term expectation of illiquidity. Alternative investments involve substantial risks and are more volatile than traditional investments, making them more suitable for investors with an above-average tolerance for risk.
Before you purchase a life insurance policy or annuity contract, be sure to consider the features, benefits, risks and fees, and whether the product is appropriate for you based upon your financial situation and objectives. Annuities are long-term insurance products.
Guarantee, as used in this material, depends upon the ability of the issuing entity to honor and pay the amount you may be entitled to. U.S. Government bonds are backed by the full faith and credit of the U.S. Government. CDs are FDIC-insured up to $250,000 per depositor. It is possible that an issuing entity may not be financially able to meet income guarantee obligations.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.