Last month, we explained how to calculate the money you’ll spend in retirement. Our step-by-step guide walked you through tallying your current spending and using your projected expenses to create a budget. But to truly design a budget that works, you need to understand more than your spending. You must also answer this question: “How much income will you have in retirement?” If you have worked with us, we have likely helped you solve this problem already! But if you are not a financial planning client, or perhaps you have friends or family members worried about their looming retirement years, this analysis can help. Retirement Question No. 2 How Much Income Will You Have in Retirement?
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To determine how much income you’ll have in retirement, start by adding the monthly total from these sources:
1. Social Security Benefits - The amount of Social Security benefits you receive will depend on your work history, contributions, and the age at which you begin to receive benefits. You can estimate your Social Security benefits at SSA.gov/OACT/quickcalc . However, it’s important to remember that Social Security payments can increase over time due to cost-of-living adjustments and may also be affected by changes to government policy or funding. In addition, the death of a spouse can result in a reduction of overall household Social Security benefits.
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2. Pension Plans - If you have a pension plan, this can be a significant source of retirement income. A pension plan provides a set monthly income based on factors such as years of service and salary history. However, it’s important to carefully analyze your pension plan to understand any potential changes to your benefits over time. For example, many pension plans reduce or stop payments in the event of the death of a spouse. 3. Rentals and Royalties - If you own rental properties or other investments that provide rental income, this can be a valuable source of retirement income. However, it’s important to remember that rental income can be subject to fluctuations in the real estate market and may also be affected by expenses such as property taxes, repairs, and maintenance. 4. Fixed Income Investments, Such as Annuities - An annuity is a financial product that provides a guaranteed stream of income in exchange for a lump-sum payment or a series of payments. Annuities can be a useful tool for providing a reliable source of retirement income. However, it’s important to carefully review the terms of your annuity to understand any potential changes to your payments over time. Annuities are guaranteed by the issuing insurance agency, but it’s important to know all the details of your payments. These income streams are likely not as reliable as you might believe. You should expect them to change over time. However, you should still calculate your likely expected income from these sources— just plan for potential fluctuations in the future. Other sources of income, which are typically withdrawals, can help supplement and provide a cushion for unexpected variations to these “fixed income” sources. We’ll factor retirement accounts, investment and savings accounts, bonds, and certificates of deposit (CDs) in a future article. With all of these potential variables and the length of time for retirement, detailed projections may be difficult without the assistance of a financial professional with experience in such matters. By carefully considering your retirement income sources and creating a stress-tested plan, you can help ensure that you have the financial resources you need to enjoy a comfortable retirement.
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