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How to Balance Retirement Income and Expenses

How to Balance Retirement Income and Expenses

February 24, 2021

Your income during retirement typically comes from several sources. Although you may receive guaranteed income from Social Security and a pension (though that is less likely as time goes on), it is likely not enough to cover all of your expenses. You may also need to draw income from other sources such as savings, investments, or supplement your income in other ways. Whatever your sources of income are, they need to cover your essential living expenses, extras like travel or hobbies, and any legacy that you would like to leave for family or institutions.

Retirement Income Sources

Government and guaranteed retirement income sources

  • Social Security - while it may not cover all of your expenses, Social Security can provide steady monthly income. You will want to make sure you maximize your benefits.
  • Pensions - Traditional pension plans are becoming less common. But if you are covered by one, this can be another source of monthly income.

Personal savings and other sources of income

  • 401(k) or other employer retirement plans
  • IRAs
  • Savings accounts
  • Taxable investments
  • Part-time work
  • Rental propery

Retirement Withdrawal Strategies

Social Security and pensions may provide a fixed amount of income each month, but you will need a plan to maximize your other assets throughout retirement. Timing when you withdraw money can have a significant impact on the taxes you pay. The order in which you withdraw money also matters. In general, the most tax-efficient withdrawal sequence is:

  1. Taxable accounts
  2. Tax-deferred accounts
  3. Tax-free accounts

Generating Income in Retirement

Once you have developed a strategy for the timing and order of your withdrawals, you will need a plan to generate cash flow while also allowing other assets to continue to appreciate. We typically recommend separating savings into three main buckets:

  • A checking account for day-to-day spending
  • A savings account to cover unexpected expenses or emergencies
  • Investment accounts for long-term growth

How long will your money need to last?

By thoughtfully planning your retirement, your various sources of income should be enough to cover the retirement lifestyle you desire. However, you should always make sure to plan for disruptions to your long-term strategy. Expenses could be higher than predicted, or your investments might not perform as planned. There are tools that can help you make reasonable assumptions about your future income and expenses, such as this saving for retirement calculator. If you have questions about how to plan for retirement, or want someone to take a closer look at your finances and investments, schedule a complimentary meeting with a Gaulden & Associates advisor.