How Can I Make Good Use of My Retirement Income?

Summary: Maximizing your retirement income includes smart planning, budgeting and strategic withdrawals as well as planning for healthcare costs, managing taxes, and handling debts effectively.

Retirement is an exciting new chapter! After years of working and saving, you finally have the freedom to enjoy life on your terms. While you make the most of your freedom, ensure you manage your retirement income well.

Managing your retirement income effectively ensures your savings and benefits last while maintaining the lifestyle you’ve worked hard for. The right planning and strategies are key to making sure your retirement income sustains you through your golden years. It is also advisable to work with professionals to help you navigate the journey and take the burden of planning your retirement off you.

In this post, we’ll share practical tips to help you maximize your retirement income and enjoy this stage of life to the fullest.

What is retirement income?

Retirement income refers to the various financial sources you rely on after you stop working. It typically includes multiple streams such as Social Security benefits, pension payments, withdrawals from retirement accounts like a 401(k) or IRA and investment returns.

Why is retirement income important?

Paying attention to your retirement income is vital because your overall financial lifestyle depends on how you manage it. Unlike in your working years when a paycheck arrives consistently, the value of your disposable income after retirement depends on how you manage and grow the amount you’ve accumulated.

Knowing how to make the most of this income is beneficial since it will support you for the rest of your life and contribute to your retirement planning.

How to estimate retirement income

One of the most important steps in planning for retirement is accurately estimating how much income you’ll have to rely on. Having a realistic average retirement income will help guide your savings and investment strategies. Here’s how to go about it:

Assess your income sources

Usually, your retirement income will come from several sources. The main ones include Social Security payouts, pensions (if any), withdrawals from 401(k)s, IRAs and investments along with any income from part-time employment.

Please note that several key factors determine your retirement income. The most crucial ones are:

• Age of retirement: If you claim Social Security at the earliest age of 62, your monthly benefits will be lower than if you wait until your full retirement age (66 or 67). Delaying retirement until age 70 can maximize your Social Security payments, as your benefits increase by about 8% each year after full retirement age.
• Inflation: Over time, inflation erodes the purchasing power of your retirement income. This means that the money you save today may not cover the same expenses in the future. Some sources of income, like Social Security, include cost-of-living adjustments (COLA), but others, such as fixed pensions, may not.
• Investment performance: The growth of your retirement savings largely depends on the performance of your investments. Stock market returns can significantly boost your retirement income, but poor investment performance can have the opposite effect.

Use social security and retirement calculators

Tools like the Social Security Administration’s retirement calculators can provide personalized benefit estimates. In addition, many financial institutions and government websites offer retirement income calculators that can help you forecast how much income you can expect from your retirement accounts. Seeking help from a financial advisor may add another layer of confidence to your calculations.

Consider pensions and other incomes

If you have a pension, your retirement income may be more predictable. Be sure to check with your employer or pension plan administrator to understand how much you’ll receive and when payments will begin. For those without pensions, retirement income will rely heavily on personal savings, making it even more essential to regularly monitor your 401(k) or IRA accounts.

Retirement income and taxes

A typical question you may have is whether you have to pay taxes on retirement income. The short answer is: yes, many types of retirement income are taxable, but how much you owe depends on the source of that income and your overall financial picture. Up to 85% of your Social Security benefits could be taxable depending on your total income.

To stay on top of your taxes, use tools like the IRS Tax Withholding Estimator. This helps you figure out how much should be withheld from pensions and Social Security to avoid tax season surprises.

How to create a retirement budget

To control your financial stability and even prepare for unexpected post-retirement expenses, you can create a budget. To maximize your retirement money, you should budget for necessary expenses, including:

• Housing: Housing cost is a major outlay whether you rent, still have a mortgage, or own your house outright. Classify property taxes, insurance, utilities, and maintenance here.
• Food: This includes groceries and dining out. Remember that food prices often grow with inflation, so make sure there is a provision for this potential increase in your budget.
• Healthcare: Your retirement years may mean you will incur rising healthcare-related costs. Plan for co-pays, out-of-pocket costs, Medicare premiums, and supplemental insurance payments.

Once your basic needs are met, set aside some money for discretionary use, such as:

• Travel: As part of your retirement planning, it is expected that you will like to travel and explore the world more. If this is a significant part of your plan, you should properly budget for your vacations and trips.
• Hobbies and entertainment: Retirement offers the chance to devote more time to your interests and hobbies. Depending on what these activities are, some of them could have significant costs, so proper budgeting is important.

To ensure your retirement budget is sustainable, a simple budget formula uses the 50/30/20 rule. Your basic needs could take up 50%, set aside 30% for wants (discretionary spending) and 20% for debt repayment.

Another strategy is to seek the advice of professionals early on, especially if you have a complex financial situation. Getting advice from financial professionals can help you get prepared for your retirement budgeting.

How to manage spending if income fluctuates

Market conditions, Social Security benefit changes, or other unanticipated events could cause your retirement income to fluctuate. Fortunately, there are ways you can manage your expenses during such times. Here are some of them:

• Keep a cash reserve or create an emergency fund in liquid accounts. This fund might serve as a cushion during times of reduced income or investment losses.
• Cut back on non-essential spending such as dining out, travel, or luxury purchases in lean income periods. Give housing and healthcare top priorities among necessary expenses.
• Should your portfolio of investments be underperforming, think about moving to lower-risk, income-generating assets like bonds or annuities.

Budgeting for Medicare and healthcare in retirement

During your working years, much of your health insurance may have been subsidized by your employer. However, once you retire, you’re likely to bear the full burden of these expenses unless you qualify for government programs like Medicare.

If you retire before age 65 (the age when Medicare eligibility begins), health insurance premiums can be particularly high. Once you turn 65, you’ll likely rely on Medicare, but this doesn’t mean your healthcare costs disappear.

Let’s see how you can adequately plan for Medicare below.

• Estimate Medicare premiums: Medicare Part A (hospital insurance) is typically free for most people, but Part B and Part D have monthly premiums. Additionally, if your income exceeds certain thresholds, you may pay higher premiums. Be sure to factor these into your budget.
• Consider supplemental coverage: Many retirees purchase Medicare Supplement Insurance and Medicare Advantage plans to cover gaps in Medicare, such as coinsurance and deductibles. While these plans have premiums, they can help reduce out-of-pocket costs.

Optimizing retirement income with smart withdrawals

Another way to maximize your retirement income is smart withdrawals. Here are a few strategies you can consider:

• The 4% Rule: This is a common approach, in which you withdraw 4% of your savings in the first year and adjust for inflation annually. It is best for retirees with a moderate risk tolerance and who aim for a steady income over 30 years.
• Fixed percentage withdrawals: Withdraw a set percentage (e.g., 3-5%) of your portfolio each year. It’s ideal for retirees who want flexibility but expect income to vary with market performance.
• Bucket strategy: Break your savings into three parts based on when you’ll need the money. Use low-risk funds for short-term needs while letting higher-risk investments (like stocks) grow.

Managing debt in retirement

For retirees with a significant amount of debt, a good amount of your retirement income can be consumed in debt payments, leaving less for your everyday needs. For those of you in this position, here are some ideas for handling debt in retirement:

• First, concentrate on clearing credit cards and other high-interest debt. Over time, this approach can save you interest payment expenses.
• Think about grouping several debts into one loan with a smaller interest rate. This can streamline your payments and possibly lower your overall interest rate paid.
• Create a reasonable budget that gives debt repayment first priority and guarantees enough for basic needs. Track your spending to see places you might cut back.

To create a customized debt management strategy, look for a credit counselor or financial adviser. They can offer direction on the best approaches for your particular situation.

Managing your retirement income wisely

Your retirement income is the key to unlocking a fulfilling and enjoyable retirement. As you approach your golden years, have a realistic budget for your income, handle your debts effectively, and manage your withdrawals.

With all that, it’s completely understandable if you feel overwhelmed by the complexities of managing retirement income. You can consider seeking professional advice from retirement planning professionals such as Mutual of Omaha to get clarity on the right way forward. We have valuable resources and personalized retirement planning tips to guide you in making smart calls as you approach retirement age.

Remember, the goal is to enjoy your retirement to the fullest and with the right strategies and support, you can make that a reality.

FAQs

What can help protect my retirement income from inflation?

Inflation can erode the purchasing power of your retirement savings over time. To protect against this, consider investing in inflation-proof assets, such as Treasury Inflation-Protected Securities (TIPS), dividend-paying stocks, or real estate.  While real estate and stocks may help protect against inflation, they come with other associated risks, so it’s recommended to do thorough research on any financial strategies prior to implementing.

How should I adjust my investment strategy in retirement?

In retirement, your investment strategy should shift toward preserving capital while still providing growth. Consider a mix of stocks, bonds and other low-risk assets. Many retirees adopt a more conservative approach by increasing their bond allocation while maintaining some exposure to equities for growth potential.

What should I do if I outlive my retirement savings?

Don’t panic if you outlive your savings. You could explore alternative income sources like annuities, reverse mortgages, or government assistance programs. Additionally, consulting a financial advisor can help develop a strategy for late-stage income management.

Can I work part-time during retirement without affecting my retirement benefits?

Yes, you can work part-time during retirement, but if you’re receiving Social Security benefits before your full retirement age, your earnings could temporarily reduce your benefits. Once you reach full retirement age, there are no penalties and you can earn as much as you want without affecting your Social Security income.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and legal advice, and the information provided herein is general in nature and should not be considered tax and legal advice. Consult a qualified professional regarding your specific situation.