Wealth Notes: Income Sources in Retirement
The question isn’t at what age I want to retire, it’s at what income? George Foreman
Wealth. Economic self-sufficiency. Financial independence. Retirement planning. These phrases all have the same definition for me – the ability to enjoy life without the need to be employed. For some, this happens at retirement. For others, it happens when they sell a business, receive an inheritance or have stock options vest. At some point, all of us will have to have our assets create income to be able to pay for all the goals and needs we have in life.
Income planning is a key piece of the work we perform for clients. Investment management and financial planning, for most clients, leads to a point in time when assets will be used to generate income. The sources of income look different for those who no longer have earned income. That happens for some at young ages but for most we target the retirement period.
Retirement these days last decades and we have to emphasize retirement spending and income planning in our financial plans. There can be many sources to use– Social Security, investment portfolios, rental properties, private business interests, government or corporate pensions, expected inheritances and any other likely income or assets. We have to create a cash-flow picture and make assumptions about how much income will come from each source and how much capital should be used. Each source has some unique features.
Social Security: Social Security can be the most predictable source of income in retirement. We look at the estimate on your most recent Social Security statement and review how much monthly income will be expected depending on the time you take it. Most of our clients target their full retirement age (sometime between 65 and 67 depending on age). Social Security can start at 62 or can be taken as late as 70. There are advantages to waiting but some people need to start early if they do not have other assets.
Investment and retirement portfolios: Most of the time, we recommend to our clients that they use the retirement plans to create wealth and take advantage of tax benefits over time. Many of our clients have additional investment assets outside retirement accounts. Portfolio income planning requires making assumptions about interest rates and expected returns on securities. We have to review whether you wish to leave an estate or plan to use most of the capital. Bond yields provided a steady source of income in the past. Today, those yields are down and we look to add additional asset classes to provide income.
Primary real estate: If you own real estate, have you considered how you will use this asset in retirement? Reverse mortgages allow you to create income or capital from your home, but then you drain that asset value over time. Other people plan to move at some point and use the capital in their home to fund future expenses. Still others wish to keep the home in the family and do not expect to use any value to create income or money for spending in the future.
Rental real estate: This should be an income source although we see many clients with properties earning too little to pay for maintenance and vacancies. Ideally, rental real estate is owned outright or with little debt by retirement so it can generate meaningful monthly income. Clients with rental properties should decide at what point they will sell the real estate (if at all) and how they will manage it over time.
Pensions: Like Social Security, pensions can make up an important part of retirement income. Teachers, military service personnel, civil servants and some corporate retirees still have pensions where they receive monthly income. For the most part, private employers have stopped pension plans and replaced them with 401(k) plans.
Work: “Retirement” no longer means stop working at a certain age and then sit on your front porch watching the cars go by. Retirement today is active and lasts far longer than it did for our grandparents. Many of our clients continue to work or volunteer. Some work for the supplemental income; others for the social and intellectual stimulation (and a few extra dollars never hurts).
Let’s talk more about income planning at our next meeting, especially if you are closing in on or have reached the time when you no longer get up in the morning and go to work. We can help you understand not just when you can retire, but what degree of income and lifestyle you can expect at that time.
As always, call or email when you have any kind of question or concern.
