For many of us, retirement feels far off, so it’s difficult to conceptualize how much retirement income we’ll need. Combine that with little experience in financial or retirement planning and it can seem altogether overwhelming.

According to the latest data from the United States Census Bureau, the median annual income for individuals aged 65 and older is $47,620, while the mean annual income is $75,254.

Generally, a solid retirement income is roughly 75 – 85% of the pre-tax income earned in your last working year, assuming you’ve saved 15% of earnings annually. That percentage may need to be revised based on your particular situation, so to get a more accurate idea of what a retirement income should look like for you, let’s dive into four key considerations.

1. Calculate Your Monthly Expenses

Before you can determine your monthly expenses in retirement, you need to have a working understanding of your current household budget. You need to know what you spend each month during your working years in order to estimate your expected expenses during retirement.

Monthly expenses might include:

  • Housing
  • Utilities
  • Health insurance—in retirement you’ll no longer receive an employee group rate, so your expense for this may increase
  • Food
  • Taxes
  • Entertainment

The general guideline for determining your expected monthly expenses is roughly 75% of what your pre-retirement expenses are. This accounts for reduced commuting costs, potentially less debt in retirement, and not setting aside money for retirement savings.

While some people may feel comfortable on 75% of their current monthly budget, other people may want to spend more on things like travel, dining, hobbies like golf or boating, and charitable giving. Planning to spend 85% of your current monthly expenses can add a financial cushion for these activities.

2. Determine Your Retirement Income

Retirement income can—and should—come in multiple forms. You should first consider when you want to take your Social Security benefit. The earliest you can receive Social Security is age 62. At this age, you will receive approximately 25 – 30% less each month than if you waited until full retirement age, which is 66 if you were born before 1960 and 67 if you were born after. Waiting to take your Social Security benefit until age 70 can be extremely helpful if you can manage it. Your checks could be 24 – 32% more than if you took it at full retirement age. You can create a Social Security account to run personalized numbers.

Some retirees will receive a pension. Common in government and union jobs, pensions typically start paying out at age 65. Similar to Social Security, your pension amount will depend on when you decide to take it. Some pensions can be taken out early at a reduced rate and can be taken out later at a higher rate. Pensions are unique to your employer and typically offer retirement counselors, which is helpful to see your individual monthly payout.

Other retirement income may come from any retirement funds you have been saving. Typically, the guideline is to withdraw no more than 4% in your first year and to adjust for inflation and your needs in subsequent years. Looking at your expenses and your retirement income, have you saved enough money? Refer to the videos and articles in our resources library for answers to some of the most common retirement and financial planning questions.

3. Decide Where to Draw

The standard rule of thumb for retirees is to take income from taxable accounts first, then from tax-deferred traditional IRAs and 401(k)s next, and letting Roth IRAs compound tax-free indefinitely. This lets traditional IRAs and 401(k)s grow tax-deferred until the required distribution age of 72.

Another goal of retirement distribution planning is to maintain a steady marginal tax rate year over year. It is important to be mindful of the funding source for larger periodic purchases — such as anew car or retirement home — and whether to take from taxable or tax-free sources.

Of course, other factors can change where you withdraw. Your retirement age is a key consideration, along with your estate planning goals, and when you claim Social Security. An Emerj360 professional can help you make the best decision for your situation.

4. Evaluate Debt and Personal Savings

It’s not necessary to have zero debt when you retire; however, large amounts of debt can be stressful while on a fixed income.

Before you retire, look at your debts and make a plan to reduce or eliminate them. Some debts are worse to carry into retirement than others. For example, high interest credit card bills, medical bills or a car loan add more strain to your retirement income than a fixed-rate mortgage would.

Sometimes carrying debt into retirement is unavoidable. If that is the case, prioritize which debts get paid down first and take action before you retire to reduce them. Using the “Avalanche Method” is mathematically the best way to pay down debt. This method involves listing your debts in order from highest to lowest interest rates, attacking the highest debt first while paying the minimum on all others. Once the highest interest debt is paid, move on to the next and so on.

Sometimes carrying debt into retirement is unavoidable. If that is the case, prioritize which debts get paid down first and take action before you retire to reduce them. Using the “Avalanche Method” is mathematically the best way to pay down debt. This method involves listing your debts in order from highest to lowest interest rates, attacking the highest debt first while paying the minimum on all others. Once the highest interest debt is paid, move on to the next and so on.

In addition to reducing debt, you should also have a personal emergency fund of three to six months of expenses saved up. While nearing retirement, you should have closer to six, if possible. Having a personal emergency fund helps protect your retirement income from being used for anything other than the monthly expenses required to pay for your lifestyle. Should an emergency happen, having set aside some money can help you avoid going back into debt. Having funds set aside means you will be less likely to rely on a credit card to cover an unexpected cost.

See the Big Picture

Working with financial professionals can help you see the big picture of your retirement. With expert knowledge, they can look over your expected expenses and income streams and identify opportunities to preserve or grow your wealth. They can review and balance your portfolio to account for your risk tolerance and in some cases, help you to comfortably retire early.

Whether you’re nearing retirement or it’s still a ways off, Emerj360 can help you find the best investment and savings options to manage and grow your wealth. As a fiduciary, we always act in the best interest of our clients by creating custom plans that incorporate tax and estate strategy alongside our financial advice and expertise. Visit our Retirement Planning page to get started.

Written By  Brett Sebion, Financial Coach
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