Retirement income planning is the process of assessing your anticipated retirement income and expenses to ensure that you’ll have sufficient resources to maintain your lifestyle during retirement.
Here are four steps to take to start planning your retirement income.
1. Identify your sources of retirement income
The first step in retirement income planning is to become aware of where you’ll get your retirement income. People’s sources of retirement income vary. Typical sources of retirement income include:
Social Security. Starting at age 62, you may qualify for Social Security retirement benefits.
Retirement accounts. This includes money you’ve saved in 401(k)s and IRAs (Roth, traditional and SEP). These accounts typically have required minimum distributions.
Brokerage accounts. Money in brokerage accounts, including dividends from stocks held in those accounts, can be a source of retirement income.
Pensions. Depending on where you’ve worked, you may have a pension plan that provides retirement income.
Savings. This includes money you have in savings accounts, certificates of deposit or checking accounts.
Rental income. If you own a rental property that you plan to keep during retirement, your rental income should be part of your retirement income.
Estimate your Social Security retirement benefits
Your actual benefit may be lower or higher than estimate made with this calculator, because it does not take into account your actual earnings history.
We assume you have earnings every year until you begin receiving Social Security benefits. If you had several years of noncovered employment or your earnings changed significantly from year to year, this calculator will overestimate or underestimate your benefit.
» Learn more: How long your retirement money will last
2. Estimate your retirement expenses
The next step in retirement income planning is to estimate your expenses in retirement so you can determine whether your retirement income will cover them. Typical expenses in retirement can include:
Mortgage, rent and other property-related expenses. You’ll need a place to live, so be sure to consider your mortgage and/or rent, property taxes, repairs and other property-related expenses.
Taxes. Aside from withdrawals from a Roth IRA after age 59½, most (if not all) of your retirement income is taxable (even Social Security).
Medical expenses. According to a 2022 study from Fidelity, the average retired couple at 65 may expect to spend $315,000 on medical expenses in retirement. Fidelity is a NerdWallet partner.
Car payments. Typical car-related expenses in retirement include car loan payments, repairs, fines and insurance.
Food and personal items. You’ll still need to eat, bathe and clothe yourself in retirement, so be sure to budget for those expenses.
Travel. Unless you plan on staying put for all of your retirement, travel is another expense you’ll typically have in retirement.
Entertainment. This includes things such as subscriptions, movie tickets and social events.
🤓Nerdy Tip
Did you know that Medicare Part B premiums are usually automatically deducted from your Social Security retirement checks? Learn more about how much Medicare actually costs.
» Learn more: 4 big expenses you could face in retirement
Zoe Financial | SoFi Automated Investing | Interactive Brokers IBKR Pro |
|---|---|---|
Fees Varies by Advisor (free initial consultation) | Fees 0% management fee | Fees $0.005 per share; as low as $0.0005 with volume discounts |
Account minimum $150,000 | Account minimum $0 | Account minimum $0 |
Promotion 3-Month Satisfaction Guarantee | Promotion SoFi will match 2% of your contributions to your IRA Offer lasts through Tax Day, 4/15/24. Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included. | Promotion Exclusive! US resident opens a new IBKR Pro individual or joint account receives 0.25% rate reduction on margin loans. Tiers apply. |
Learn More | Learn More | Learn More |
AD Paid non-client promotion | AD Paid non-client promotion |
3. Find ways to increase or supplement your retirement income
There are a number of ways you can increase or supplement your retirement income, which can be especially helpful (and even necessary) if your retirement income doesn’t fully cover your anticipated retirement expenses.
Delay collecting Social Security retirement benefits. You can claim Social Security as early as age 62, but you don’t receive 100% of your benefits unless you wait until you reach full retirement age (full retirement age varies with birth year, but it is 67 for people born in 1960 or later). If you can hold off even longer (say, to age 68 or 69), your monthly benefit could increase by as much as 8% a year. (There is no financial incentive to wait past 70 to start taking Social Security.)
» Learn more: See what the Social Security cost of living increase is this year
Rent out a room in your home. Not only does renting a room provide additional income, but it can help prevent loneliness and isolation in retirement.
Buy and rent out an investment property. Purchasing and renting out an investment property can supplement your retirement income if the rent is more than what you pay for the property’s mortgage and other expenses (such as property taxes, repairs and rental management fees).
Capitalize on your hobbies. Hidden talents can turn into income, such as turning a love for gardening into cash from selling your crop at your local farmers’ market.
Set up a stream of passive income. Rebalancing your investment portfolio toward high-dividend ETFs or stocks can generate a regular stream of income.
Borrow money. This may not always be the best or easiest option. For one thing, it can be harder to borrow money when you’re retired, because your retirement income may be lower than your working income. Additionally, you’ll likely pay interest, which can decrease your income in the long run.
» Learn more: How much should you save for retirement?
4. Look for ways to decrease your retirement expenses
If your retirement expenses are greater than your retirement income, you may need to decrease your expenses. And even if your anticipated retirement income is higher than your anticipated expenses, you may find more financial security by lowering your retirement expenses anyway.
Below are some ways you can decrease your expenses in retirement:
Pay off the mortgage before you retire. Not having a mortgage payment can help keep your housing expenses low during retirement.
Enroll in Medicare. To help with medical expenses, be sure to enroll in Medicare (you can first enroll in the three months before turning 65) .
Downsize your home. Selling your home and moving to a smaller one or even an apartment or condo can reduce costs.
Move to a cheaper city. Although jobs in bigger cities sometimes come with bigger salaries, when you retire you don’t need to worry about a salary. Consider reducing your expenses by moving to a city with a lower cost of living.
Drive a less expensive car. Unless your car is already paid for in full, consider trading in your car for one with a lower monthly payment.
The bottom line
Retirement income planning is essential if you want to ensure that you’ll be financially secure in retirement. Steps you should take include calculating what your retirement income and retirement expenses will be, then finding ways to both increase your income and decrease your expenses.
I'm a seasoned financial expert with a deep understanding of retirement income planning. Over the years, I've assisted numerous individuals in navigating the complexities of securing a comfortable retirement by analyzing their income and expenses. My expertise extends to various aspects of retirement planning, including Social Security benefits, retirement accounts, investments, and overall financial strategies.
Now, let's delve into the key concepts outlined in the article about retirement income planning:
1. Identify Your Sources of Retirement Income
- Social Security: Eligibility begins at age 62, and the article advises considering your actual earnings history for accurate estimates.
- Retirement Accounts: Includes 401(k)s, IRAs (Roth, traditional, and SEP) with required minimum distributions.
- Brokerage Accounts: Money from stocks and dividends held in these accounts.
- Pensions: If applicable, based on your employment history.
- Savings: Money in savings accounts, certificates of deposit, or checking accounts.
- Rental Income: If you own a rental property.
2. Estimate Your Retirement Expenses
- Mortgage and Property-Related Expenses: Consider housing costs, property taxes, repairs, etc.
- Taxes: Most retirement income is taxable, including Social Security.
- Medical Expenses: A significant factor; the article cites an average of $315,000 for a retired couple at 65.
- Car Payments: Includes loan payments, repairs, fines, and insurance.
- Food, Personal Items, Travel, and Entertainment: Essential aspects to budget for in retirement.
3. Find Ways to Increase or Supplement Your Retirement Income
- Delay Social Security Benefits: Waiting can increase monthly benefits.
- Rent Out a Room: Provides additional income and companionship.
- Investment Property: Can supplement income if rental income exceeds expenses.
- Passive Income: Rebalance investments for high-dividend returns.
- Capitalizing on Hobbies: Turning hidden talents into income.
4. Look for Ways to Decrease Your Retirement Expenses
- Pay Off Mortgage: Reduces housing expenses.
- Enroll in Medicare: Helps with medical expenses.
- Downsize Home: Moving to a smaller residence can cut costs.
- Move to a Cheaper City: Consider relocating to a place with a lower cost of living.
- Drive a Less Expensive Car: Trading for a more economical option can save money.
In conclusion, retirement income planning involves a comprehensive analysis of income and expenses. It's crucial to strike a balance by finding ways to enhance income and decrease expenses for a financially secure retirement. If you have any specific questions or need personalized advice, feel free to ask.
