Build a retirement "paycheck"
Designing an income stream is a critical step in preparing for retirement living expenses and lifestyle. Social Security, retirement plans, pensions, personal savings and investment accounts are common sources for most people.
First, consider Social Security. The age at which you collect Social Security is a highly personal decision that should be carefully weighed by doing a cost-benefit analysis as well as looking at your whole financial picture. Benefits only replace about 40% of the average earner’s pre-retirement income, according to the Social Security benefit structure.1 By working with you to develop an independent income stream in retirement, your financial advisor can help prevent potential Social Security uncertainty from negatively impacting your future lifestyle.
Retirement benefits are the cornerstone of the Social Security program
Next, consider that you’ll probably have to draw from your own accounts, too. Taking withdrawals from the right accounts in the right order can help extend the life of your financial assets, and that is a core objective of building your retirement "paycheck." Here's what you need to know about the various accounts you may have:
- A traditional IRA is usually funded with tax-deductible contributions, and after age 59 ½, you may take penalty-free distributions from it — but they're taxable.
- A Roth IRA is funded with after-tax contributions. As long as you’ve had a Roth IRA for five years or more and are 59 ½ or older, you can take tax-free distributions. Another important feature of Roth IRAs is that withdrawals are not required until the death of the owner.
- Investigate the other options your employer offers, as well. For example, your 401(k) might include a Roth 401(k) option, or your employer might offer a defined benefit plan. Check to see if catch-up contributions might be allowed.
- Withdrawals from your 401(k), or Roth 401(k), are treated similarly to traditional and Roth IRA withdrawals; however, Roth 401(k)s are subject to required withdrawals.
- Your non-qualified investment brokerage accounts and bank deposit accounts are taxable accounts.
- If you are considering withdrawals prior to age 59 ½, consult with your financial advisor.
Taking withdrawals from the right accounts in the right order can help extend the life of your financial assets
Withdrawal strategies may vary based on your individual goals and tax bracket, and every case is different. If you have questions about what's right for you, your financial advisor can help you review your options.
1Social Security Administration