Recent research has shown that 1 in 8 retirees are likely to “unretire” in 2025. The driving force behind this trend is that retirement income isn’t enough to match the rising cost of living.
In today’s world of inflation and economic uncertainty, you no longer just need a plan to retire. You also need a plan to stay retired. To do this, ensure that your income grows with the cost of living and can support you throughout the remainder of your life.
Understand Your Sources of Retirement Income
The first step in mastering your retirement income is understanding where it will originate. Americans relied on a “three-legged stool” of income sources in the past – pensions, investments, and Social Security. However, the disappearance of pension plans over the past few decades has left most people with a “two-legged stool” that balances somewhat precariously on their investment income and Social Security.
The amount of income that each “leg” of the stool provides can vary widely based on your individual situation. Research shows that the average person who earned $50,000 prior to retirement replaces about 45% of that income with savings and 35% with Social Security. The remainder of their income does not need to be replaced due to a lower cost of living in retirement. On the other hand, the average person who earned $300,000 prior to retirement replaces about 44% of that income with savings and only 11% from Social Security.
Whether your plan matches one of these scenarios or falls somewhere in between, striking a balance between the two main sources of retirement income is paramount. This involves maximizing income from each source to reduce the strain on the other “leg” of your retirement income plan.
Maximize Your Social Security Income
Social Security rarely provides enough income to maintain your lifestyle without supplementary income from other sources. However, every dollar you claim in benefits reduces the amount your investments need to earn to cover your expenses.
Benefits are calculated based on a standard formula using your highest 35 years of earnings. You cannot go back in time and choose a more lucrative career path to increase your benefits, but you do have control over the age at which you claim.
You receive your “standard” benefit at Full Retirement Age – which is between 66 and 67 for most people. You can also choose to claim a reduced benefit as early as age 62 or delay benefits up until age 70 to earn a higher monthly amount.
There is no one-size-fits-all solution for when to claim Social Security benefits. Instead, the right time for you will depend on your intended retirement date, personal financial situation, health, marital status, and spousal benefits.
Transition Your Portfolio to Defense
Income from your investments creates the other “leg” of your retirement income stool. The amount of this income depends on how your portfolio is invested and the overall performance of those investments. That’s why it is generally wise to transition your portfolio from investments intended to grow your assets to those intended to generate reliable income without putting too much of your money at risk. In other words, transitioning your portfolio to defense.
A defensive portfolio typically consists of lower-risk assets, like bonds, that pay reliable dividends and are not as susceptible to large fluctuations in value as other assets. These investments are preferable for most retirees because they support the dual goals of preserving the value of the portfolio and generating income that can be used to cover living expenses without selling investments.
Prepare for Common Threats to Your Retirement Plan
With your Social Security income maximized and your portfolio geared toward income generation, you have a strong foundation of retirement income. However, there are still threats to your financial success. These often come in the form of large, unexpected expenses that could force you to liquidate a portion of your portfolio – and dampen your potential future earnings.
Plan For Long-Term Care Costs
Nearly 7 in 10 people will need some form of long-term care during their lifetime and the most expensive forms of this care can cost over $117,000 per year. Advance preparation for these expenses can help you protect your portfolio from the unexpected shock and maintain your retirement income.
There are three main options to prepare your financial plan for long-term care costs. First, you can self-fund, meaning you can set aside a portion of your assets to cover this potential expense. Second, you can purchase specialized long-term care insurance to cover these expenses if the need arises. Third, you can choose a hybrid life insurance and long-term care policy or a life insurance policy with a long-term care rider.
The right choice between the options will depend on your family history, monthly cash flow, and overall financial plan. An experienced financial advisor is an excellent resource for comparing the options and helping you prepare your financial plan for these costs.
Get A Robust Healthcare Plan
Like long-term care, unexpected medical bills can quickly erode the value of your portfolio. Many retirees rely on Medicare to help cover their healthcare costs in retirement, and this government insurance reduces medical costs for seniors by about 64%.
While “original Medicare” – Parts A and B – cover many costs for retirees, they don’t cover everything, and surprise medical expenses are still a threat to your retirement income. That’s why supplemental coverage through a Medigap or Medicare Advantage plan is a wise decision for most people.
If You’re Still Unsure Your Income Will Last, Consider an Annuity
A plan to maximize sources of income and cover unexpected expenses is enough to provide financial security for most retirees. However, if you are still worried that your income will run out, you could consider an annuity. These contracts have important limitations, so it is very important to understand the risks before you invest.
Annuities are insurance contracts that can provide guaranteed income for your life – or your and your spouse’s life, depending on the agreement. These contracts can reduce the stress of retirement income planning by providing a guarantee that your income will not change as long as you live.
While there are benefits to purchasing an annuity, there are also important factors to consider before you commit. First, accessing your funds in an emergency is often difficult and costly due to steep surrender charges. Second, inflation erodes the purchasing power of your guaranteed payments, making them less valuable the longer you live and potentially creating a situation where your bills have outpaced your income. Finally, these contracts are often expensive due to fees and commissions – which reduce the total value of your portfolio.
No matter which retirement income strategy you choose, it is wise to partner with a financial advisor who can help you tailor your plan to your goals. The right team of financial professionals can help you maximize your income and prepare for threats to your success – resulting in a plan that provides income that lasts a lifetime.
Optimize Your Retirement Income Strategy with Meld Financial
At Meld Financial, our experienced team will help you craft a retirement income plan that provides for your needs throughout your life. We specialize in retirement planning and have helped clients navigate their post-career lives for over 40 years.
Throughout our tenure of financial planning, we developed a comprehensive wealth management program called Financial Fingerprint®. It is the key to growing assets during your working years and generating reliable income in retirement.
To learn more about Financial Fingerprint® and get started, contact a member of our team today.