As you get ready to transition to retirement, it is very important that you have a very good understanding of where your income is going to come from, how that income has the potential to grow over time, and how much coverage of your expenses this will provide. It is only after this understanding that you can then structure your savings to guard against potential pitfalls of a lengthy period of your life with little to no earned income.
Social Security
While the system certainly has flaws and risks, it is a fairly decent bet that retirement benefits will “be there”— is some fashion— for the baby boom generation. Make sure that you know the effect taking early benefits may have on your income, as well as whether it would be worth it to wait until later to gain a higher income stream.
The taxation of your benefits is also a large consideration. Currently, an individual filer earning between $25, 000 and $34,000 would have 50% of their benefits subject to income tax. If the individual earns more than $34,000, then up to 85% of your benefit may be taxable. For joint filers, the 50% threshold is between $32,000 and $44,000. More than $44,000 is at the 85% level. Because of these adjustments to taxability, structuring your other income and investments efficiently becomes very important in retirement.
Defined Benefit Pension Plans
While these types of plans are becoming a rarity, some people who work for long-established corporations may still have some sort of income stream payable to their retirees after years of service. Additionally state and federal workers also generally have some type of “pension”. Understanding the income benefits to your surviving spouse, as well as any cost of living adjustment (inflation factor) are very important in evaluating these plans. Some state and federal pensions exclude or limit you from Social Security retirement benefits (largely because no payroll tax was contributed to the system in your earning years).
Other Sources of Income
While you may have rental property or plan to work part-time in retirement, these can both be less lucrative or consistent than you plan. Statistics have shown than plans to work in retirement can be dashed by a health event, or by being squeezed out of the workforce due to economic reality. While a rental can be good income, managing the upkeep and vacancy can cause inconsistencies in the income planning for these properties.
Ultimately, comfort and confidence are most important as you begin to plan for transition to retirement. A better understanding of all of your income sources can provide a needed clarity to structure your savings efficiently. This involves knowing your expenses inside and out, as well as how taxation is likely to affect you. You also should feel comfort with your guaranteed income coverage of those expenses, and how much gap there may be between your income and your necessary spending.
