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Retirement Income Planning


August 31, 2020

Do you have a retirement plan?

A recent report from the U.S. Federal Reserve showed that nearly 25% of all American adults have no retirement savings or pension.

The data showed that 42% of people aged 18-29 have no retirement savings, and the same for 26% of Americans in the 30-44 bracket. For those closer to retirement, 17% of people aged 45-59 reported no savings or pension.

Why aren’t people planning for retirement?

Every high school in America should have a mandatory retirement income planning class, but unfortunately, that’s not the case. The primary reason people aren’t taking action on their retirement income planning is a lack of education on the topic. Because most people don’t get a proper education on the topic, they make uninformed decisions based on false assumptions.

People are good at making excuses for not planning for retirement. The most popular excuses for not taking action on retirement income planning include:

  • “I’m too busy”
  • “It’s too soon”
  • “It’s too late”
  • “I don’t have enough money to get started”
  • “My finances are a mess”
  • “The Government will take care of me”
  • “Between my savings and 401(k) I’ll be fine”
  • “I don’t want to think about that now”
  • “I don’t know how”

Who Needs a Retirement Plan?

The reality is everyone needs a retirement plan, because we all reach a point where we can no longer work, even if we want to. A retirement plan is like a habit that grows over time, and one that you get better at by practice. The sooner you start, the more you can save, and the better you’ll get at making your plan stronger as the years pass.

In this article, we’re going to dive into retirement income planning. We’ll look at what it is, how to get started, different structures and tax strategies, mistakes to avoid, and myths to dismiss.

When you finish this article, the excuses will lose their power, and you’ll be ready to start you journey to a financially secure retirement - and maybe inspire friends and family to do the same.

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What is Retirement Income Planning?

It’s always a good idea to start with definitions when trying to understand a topic. So here we go...

Retirement income planning is the process of determining your retirement income goals and the actions and decisions necessary to achieve those goals. It includes identifying sources of income, estimating your expenses, starting a savings/investing plan, and managing assets and risks.

Retirement planning is a life-long process. The sooner you start, the better, but if you haven’t started, it’s never too late.

The simplest way to understand retirement income planning is to think of it as planning for life after paid work ends. And not just financially, but in all aspects of life. A big part of what determines your retirement plan is what kind of lifestyle you want.

Why is Retirement Income Planning Important?

Retirement income planning is important for nearly everyone, regardless of education or wealth. Today, people are living longer than ever before. This means you could live for another 25-30 years after you stop working. If you’re prepared, those years can be some of the best years of your life. You truly can have “golden years” with the right planning. If you fail to plan, your golden years can be filled with uncertainty, stress, and worse.

Some of the biggest benefits of retirement income planning include:

  • Better health from lower stress levels
  • Fewer taxes
  • Better career and financial decision when you’re young
  • Happier marriage
  • Flexibility in retirement age
  • You won’t be a burden for your children
  • Start a legacy of charitable giving
  • Avoid running out of money
  • Enjoy the finer things in life

What are the Stages of Retirement Income Planning?

People start their retirement income planning at different stages in life depending on a variety of reasons. No matter your age, or what stage in life you are, now is always the best time to start planning. Typically we break the stages of retirement planning into three different stages.

Young Adulthood (age 21-35)

At this stage, you may not have a lot of money to invest, but you do have time to let your investments mature, which is a massive advantage. Compound interest allows you to earn interest, and the more time you have, the more you earn. Even if you can only set aside $50 a monthly, it will be worth three times more at retirement if you invest it at age 25 versus age 45.

Early Midlife (36-65)

You’ll achieve your peak earning potential during this stage of life. You should be taking advantage of any 401(k) matching programs offered by your employer. Looking at life insurance and disability insurance is important as well. You want to make sure your family can survive financially without pulling from retirement savings if something happens to you.

Later Midlife (50-65)

As you approach retirement your investment accounts should become more conservative. At this stage, you may benefit from having paid off major expenses like mortgages, student loans, and other debts. This will give you more disposable income to invest. You can still set up a and contribute to a 401(k) or an IRA at this stage in life. In fact, from age 50 and on you can contribute an additional $1,000 a year to your traditional or Roth IRA, and an additional $6,000 a year to your 401(k).

How Much Retirement Income Do I Neeed?

The quick and accurate answer is - “it depends on your goals” - however, most experts will tell you that your retirement income should be about 80% of your final pre-retirement salary. So if you’re making $100,000 each year, you’ll need $80,000 to have a comfortable lifestyle after leaving the workforce.

What is the 4% Rule?

The 4% rule is another way to determine how much money you need to save to get to a comfortable retirement. The calculations are simple. Take your desired annual retirement income and divide it by 4%.

For example, if you need $80,000 per year to live comfortably, the calculation will be (80,000 / 0.04). The result is $2,000,000. So you’ll need to build a nest egg of $2 million to achieve the retirement you want.

For the rule of 4% to play out accurately, you must commit to it every year. If you stray for just one year it can have major consequences on your principal, which will impact the compound interest and your nest egg.

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How Do I Create a Retirement Plan?

At this point, you’re starting to understand what a retirement plan is, and how much income you need to have to retire, but you’re probably now wondering how to create a retirement plan.

This first thing to keep in mind is everyone’s retirement plan will be unique to them. Aside from the numerical calculations, humans have an infinite amount of wants and desires. Your lifestyle goals (wants and desires) are completely unique to you and direct the design of your retirement plan.

There are two ways to create a retirement plan. The first way is research, read books, take courses, and gain an understanding of investing and taxes to a degree that you can make informed decisions and design a good plan. The second, easier, and safer way, is to work with a financial advisor that has spent years helping clients design effective retirement plans.

Most people simply do not have the time to become enough of an expert on financial planning to design and implement an effective retirement plan. That’s okay, because there are many professional financial advisors that are affordable, and can guide you through the entire process.

With that said, let’s look at a broad overview of what creating a retirement plan will look like, whether you try to do it yourself, or get guidance from a professional.

What are the Steps to Creating A Retirement Plan?

Step 1: Start with Your Goals

Your retirement plan is unique to you because it’s centered around your specific needs and goals. Start with these two statements and fill in the blanks.

“I plan to retire when I’m _____ years old.”

“I’ll need about $_______ a month for expenses.”

Your expenses include needs like food, housing, and healthcare, and wants like travel, entertainment, and gifts. Everyone’s situation is different, but the standard approach is to plan for the same income you have today. Remember, some costs like work-related expenses and retirement contributions will decrease, while others like health care and travel may increase. Next, fill in the blanks for these two statements:

“I need my retirement money to last about ______ years.”

“I plan to save $______ a month for retirement.”

On average, most people will plan to live until age 95. If you retire at age 65, this means you’ll need your money to last about 30 years.

Step 2: See Where You Are Now

Now that you know what your goals are, the next step is to determine if you’re on track to achieving your goals. You can use one of the many retirement savings calculators available online, or if you’re working with a financial advisor, they can help you make this calculation.

Your calculation will take into account all income you might have during retirement, like social security, pension, rental income, or an annuity.

After you’ve made your calculations you’ll know where you stand. Most people will not be on track to meet their goals. That’s okay, the purpose of a well-designed retirement plan is to get you on track and keep you on track. You may have to adjust your retirement age, annual savings, or expected retirement expenses to increase the odds of hitting your goal.

Step 3: Decide How You Will Save and Invest

Now things are getting complicated. It’s not enough to just save, but you must put your retirement money in the right places to get the most benefit. Some general recommendations include:

  • If your employer offers a company match in your 401(k), 403(b), 457(b), or Thrift Savings Plan make sure to maximize your contributions.
  • It’s a good idea to put money away for future health care costs in a Health Savings Account (HSA).
  • If you don’t have an employer-sponsored account or don’t have one, consider a traditional or Roth IRA.
  • Once you’ve maxed out your IRA, consider a brokerage account to save even more.

Step 4: Check and Update Your Plan

Your retirement plan is a living plan that changes with you. As your goals and investments change so will your plan. At a minimum check and update your plan at least once a year to make sure it still makes sense. Always revisit it after major life events like welcoming a new baby, marriage, divorce, job changes, or the loss of a loved one.

What are the Most Popular Retirement Plans?

A retirement plan is a holistic plan that factors in your goals, needs, and how you will achieve them after you stop working. It’s common for people to get the term “retirement plan” mixed up with components of retirement plans. With that said, a lot of people have a vague familiarity with some components of retirement plans but aren’t’ really sure what each one really means, and if they qualify.

In this section, we’re going to look at the most popular components of employer-sponsored retirement plans and make sure you understand each one, so you can determine if it’s relevant to you.

401(k) Plans

The most common employer-sponsored retirement plan today is the 401(k). These plans are typically offered by large, for-profit businesses. It is considered a defined contribution plan funded by you but often comes with a partial or full employer match. You choose which investments you’d like in your 401(k) plan and will have complete control over the money after retirement age.

403(b) Plans

A 403(b) plan is virtually identical to a 401(k) plan, except that it’d designed for nonprofit organizations. This includes public schools, hospitals, churches, and other nonprofit organizations. The plans are funded by employees and employers can match contributions up to a certain percentage. Investment earnings accumulate on a tax-deferred basis, and contributions limits are the same as 401(k) plans.

Roth 401(k) Plans

Some employers offer a Roth 401(k) plan. They provide the benefits of a regular Roth IRA, but your contributions are the same as those for a regular 401(k) plan. Just like a Roth IRA, contributions into a Roth 401(k) are not tax-deductible. Your earnings accumulate on a tax-deferred basis. However, distributions from the plan will be tax-free, as long as you’re at least 59 ½ and have been contributing for at least five years.

457 Plans

457 Plans are pretty much 401(k) plans for state and local government employees. They work the same way as 401(k) plans have identical contribution limits. The main difference is if an employer offers both a 457 and a 401(k) plan, the employee can fully contribute to both plans, which results in a doubling of the limit for a 401(k). So, you could contribute $19,500 to each one for a total of $39,000 in 2020.


SIMPLE stands for Savings Incentive Match Plan for Employees. It’s a type of IRA plan offered by an employer. These plans are often offered by smaller employers who do not offer more complex retirement plans. You’ll make tax-deductible contributions to the plan, and your employer must make either matching contributions (maxed out at 3% of your salary) or nonelective contributions. The maximum contribution to a SIMPLE IRA in 2020 is $13,500.

SEP Plan

A SEP is a Simplified Employee Pension plan that allows small businesses to have a simple method of administering retirement plans for employees. They have the same investment, distribution, and rollover requirements of traditional IRAs, however, the limits are much more generous.

Defined Benefit Pension Plan

Referred to as traditional retirement plans, defined benefit pension plans used to be the most common type of employer-sponsored retirement plan, up until the 1970s. Today, these plans are rare. A defined benefit pension plan has a defined benefit which they will receive at retirement. They are not responsible for making any contributions to the plan, all contributions are supplied by the employer. The benefit is based on income and years of service.

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Tax Strategy and Retirement Income Planning

One of the biggest parts of your retirement income plan will be designing a strategy to maximize your tax benefits. There are a lot of mistakes and missed opportunities you can find yourself dealing with if you don’t have a clear understanding of how to navigate taxes within your retirement plan.

In this section, we’ll look at some big tax mistakes you should avoid with your retirement income plan.

The IRA Rollover Mistake

Imagine you have $200,000 in a 401(k). After retirement, you take it as a distribution, but you failed to fill out the paperwork correctly. As a result, your company withholds $40,000 in taxes. You deposit the net $160,000 into an IRA within 60 days as an IRA rollover. However, now you have to come up with $40,000 to deposit in order for the entire $200,000 to count as a rollover. If you don’t have the $40,000 to make up for the tax withholding, that money then becomes a taxable distribution and you have to pay taxes on it. When you leave an employer must know how to roll over your funds correctly to avoid a situation like this.

Not Knowing About RMD’s

Once you reach age 70 1/2, if you have money in a traditional IRA or other formal retirement plans like a 401(k) or 403(b) you are required to take distributions. The amount is determined by your age and your account balance. If you don’t take out the required amount, you can owe a penalty tax of up to 50 percent of the amount you were supposed to take.

Taxes on Pensions and Social Security

Most forms of retirement income are taxable. After retirement, if you didn’t have the right amount in taxes withheld from your pension or social security income, you’ll be in for a big and unpleasant surprise. To avoid this you should do a tax projection to estimate your taxable income and your tax rate, to make sure you have the right amounts withheld.

Tax Planning Before Retirement

Don’t wait for tax planning until you retire. You don’t want to be in a situation where you could have converted money from your IRA to a Roth IRA and paid NO tax. Proper tax planning can save you thousands of dollars every year, and help your nest egg last longer.

Take Advantage of IRAs

Many people mistakenly think they can’t fund IRA’s if they have a retirement plan at work. The reality is it depends on your income. You may be eligible to make an IRA contribution and not be aware. Make sure to find out if your company retirement plan offers the ability to make Roth contributions. Roth contributions go in after-tax, so they don’t reduce your current year’s taxable income - but they do come out tax-free.

Strategic Withdraw

One of the biggest tax mistakes retirees make is taking Social Security early while waiting to withdraw from IRAs and other retirement accounts. Using your retirement money in the wrong order can result in paying thousands more in taxes each year.

An experienced retirement planner can help make sure your tax strategy is sound and make sure you’re maximizing your tax benefits.

Why Work with a Financial Advisor for Retirement Income Planning?

Now you should have a pretty good idea about what goes into retirement income planning and why you need to do it, you still might be wondering how to get started. As you can see there are a lot of moving parts and it can get complex.

The easiest way to move forward is to work with a financial advisor that specializes in retirement income planning. A retirement planner or advisor can guide you every step of the way and offer informed advice on important decisions that will affect your long-term quality of life.

They can advise on:

  • How to maximize your social security benefits
  • What pension distribution choices are right for you
  • If an annuity is a good investment for your circumstances
  • Which accounts you need to take withdrawals from each year, and in what amounts to minimize the retirement taxes you’ll pay
  • What amount of retirement income you can expect to have
  • What withdrawal rate is appropriate when taking money from your portfolio
  • How much money should be in guaranteed investments
  • What types of taxable income your investment will generate
  • How you can rearrange investments to reduce taxable income in retirement
  • Whether to leave your money in a company plan or roll it into an IRA account
  • Whether to keep your life insurance policies or not
  • And a lot more!

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