Optimize Your Retirement Income Strategy

January 9, 2022

Topics: Budgeting | Saving for retirement | IRAs | Retirement Income | Social Security | Defined benefit pension plan | Insurance | Asset Allocation | Spending

Media type: Article, Podcast

Optimize Your Retirement Income Strategy

7.5 minute read • 

January 9, 2022

At first glance :

Retirement income resources and strategies are available to help you achieve your goals and mitigate retirement risks.

Start thinking about your retirement today.

For many, retirement comes with a sigh of relief – after years of hard work, you can finally relax and reap the rewards of your labor. One of the biggest changes you will encounter is in your budget. You will move from the accumulation phase (saving for retirement) to the reduction phase, where you will spend the money you have saved. Since your financial needs will vary during retirement, it’s important to understand what resources are available to you and how to manage them. The following sources of income and strategies can help you in retirement.

Irish Republican Army

What is that? An IRA is a tax-advantaged savings plan that individuals use to save for retirement. There are two main types of IRAs:

Tradition and Roth. How does this help you achieve your goals? An IRA allows you to save for the long term and offers tax-free or tax-deferred growth.

How does it help reduce risk? An IRA can help supplement other retirement accounts you may need to provide more retirement income, reducing the risk of running out of money.

what to remember Factors such as age and how long you’ve had your account open can affect when you can or should withdraw money.

Employer-sponsored pension plan

What is that? Employer-sponsored retirement plans, such as 401(k)s, allow you to deposit a percentage of your pre-tax pay directly into long-term investment accounts.

How does this help you achieve your goals? You can choose investments from your employer’s plan, usually stock and bond funds and term funds. When you retire, you can increase the savings in your account, transfer your money to an IRA, or start making qualified distributions and use that money for discretionary spending.

How does it help reduce risk? Since employer plans offer a variety of assets, you can create a diversified and balanced portfolio to help reduce market risk. Plus, you can choose target date funds, which are designed to help you manage risk as you approach your retirement date (your target date).

what to remember There are different types of employer plans and the rules regarding withdrawals vary. Be sure to review your specific plan to make the best choice for you and your goals.

social Security

What is that? Social Security is a federal government program that provides a guaranteed monthly income (adjusted for inflation) for your lifetime. The monthly payments are designed to replace part of your pre-retirement income. The amount you receive depends on your lifetime earnings and when you started receiving money.

How does this help you achieve your goals? Social Security is an additional source of income that can add to the savings you’ve already amassed (it can also help kick-start those savings).

How does it help reduce risk? Think of your social security benefits as a safety net. They can supplement other retirement income to ensure you don’t run out of money in retirement.

what to remember Most taxpayers have to pay social security contributions on their earnings in order to qualify for a later payment. Social Security payments add to your monthly income, which can mean thousands of dollars of difference over your lifetime.

In addition to these main sources of income in retirement, you may have other sources of income, including pensions, home equity, insurance contributions and earnings from work. defined benefit pension plan

What is that? A defined benefit pension plan is a private or government financial resource with guaranteed payouts. Although not as common as they once were, most US governments and some private companies still provide pensions. Finance, nursing, insurance, and the military are some examples of industries with pensions.

How does this help you achieve your goals? This type of plan can serve as a base level of income for retirees and help cover day-to-day expenses. However, if your basic needs exceed your retirement expenses, you will need to make up the rest with other sources of retirement income.

How does it help reduce risk? Pension payments are generally stable, reducing longevity and market risk.

what to remember This source of income may be affected by factors such as your marital status, income level, work history, health insurance, so please check with your pension fund for details.

real estate

What is that? Much of people’s wealth comes from home ownership, and some people may need to use it as a source of income.

How does this help you achieve your goals? A home is often one of the most important assets left to your heirs, so you need to decide whether you want to keep your property for inheritance purposes or sell it for income. How does it help reduce risk? Converting home equity into income reduces the risk of running out of money. However, the process can be complicated, you may want to consider your other sources of income before using it.

what to remember Be sure to carefully analyze your retirement expenses so you know if and when you need to tap into the equity in your home. Insurance

What is that? Insurance can provide protection against unforeseen health events, thus avoiding unforeseen expenses. There are several types of health-related insurance – government-provided, private, long-term, and supported. Additionally, life insurance can help address the longevity risks of a surviving spouse or partner. As with all types of insurance, you need to carefully weigh the costs and trade-offs to decide which type of coverage is right for you. How does this help you achieve your goals? Insurance can cover against health and other risks and increase peace of mind.

How does it help reduce risk? This can reduce the impact of unforeseen health expenses and, in the case of life insurance, provide support for the surviving spouse or partner.

what to remember Insurance can be expensive, so you’ll need to decide whether your existing coverage should be continued in retirement or whether you need a new type of coverage.

work income

While some may think that retiring means no longer being registered, many retirees choose to continue working, even if only part-time. Working can increase your savings and help slow the depletion of other resources. Additionally, continuing to work can help prevent cognitive decline and provide physical and emotional benefits.

Understanding your retirement income resources and strategies is key to planning for a long and happy retirement. You do not know where to start ? Speak to a Vanguard consultant today to get started

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You can make the most of your retirement income streams by using a specific asset allocation that matches your goals.

asset allocation

What is that? Your asset allocation is the investment strategy you use to balance risk and return in your portfolio. Depending on the exposure to bonds and equities in your combined portfolio, your asset allocation may be more conservative or aggressive. A balanced and diversified asset allocation is the key to a successful retirement.

How does this help you achieve your goals? Your asset allocation is what determines the growth rate of your portfolio. Your allocation should reflect your risk tolerance and target time horizon. It should also be diversified to help protect your account from market declines. How does it help reduce risk? A diversified portfolio invested in both low and high risk assets allows room for growth while protecting against market risk.

key points Always consider your goals and timeline when choosing an asset allocation. We recommend reviewing your portfolio 3-4 times a year to ensure it matches your preferred asset allocation. Now that you’ve exhausted most of your sources of income, here’s how you can plan for your retirement expenses.

consumption strategy

What is that? A spending strategy can help ensure that you have enough money for your basic needs and any discretionary spending. Four elements generally affect the amount of money you can spend from your wallet. they are:

asset allocation. time limit.

Degree of certainty:

Also known as “hit rate”, or the likelihood that your portfolio will last through the time horizon or life expectancy. The lower your certainty, the less money you are willing to spend.

Consumption elasticity:

Once you’ve settled on your expenses, find out how much you can spend on discretionary items.

How does this help you achieve your goals? A solid spending strategy can increase your chances of reaching your retirement goals. It can also help you feel more comfortable.

How does it help reduce risk? A stable spending strategy reduces tax risk. Since your savings will likely be invested in a combination of taxable and tax-advantaged accounts, the order in which you withdraw them will affect the amount of tax you pay. what to remember After you have covered your basic expenses, assess how much of your wallet you can devote to discretionary expenses.

What should you remember? Assess how much of your portfolio can be used for discretionary spending after meeting your basic expenses.