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Retirement Income, Savings and Spending

It’s important to understand your retirement income sources when you retire.

Retirement Income Sources

Comoon income in retirement is usually from:

1. Social Security Income: Social Security income refers to the retirement benefits provided by the Social Security Administration. During your working years, you contribute a portion of your earnings to the Social Security program through FICA taxes. In retirement, you become eligible to receive monthly payments based on your earnings history and the age at which you claim benefits. Social Security income is a common and reliable source of retirement income for many individuals.

2. Pensions: Pensions are retirement benefits provided by either the government or an employer. These are typically defined benefit plans where a predetermined amount is paid to eligible retirees based on factors such as years of service and salary history. Government pensions are offered to employees of federal, state, or local government agencies, while company-sponsored pensions are provided by private sector employers. Pensions provide a stable source of retirement income, although they have become less common in recent years.

3. Retirement Plan Accounts: Retirement plan accounts, such as 401(k), 403(b), and 457 accounts, are tax-advantaged investment vehicles offered by employers or certain nonprofit organizations. These accounts allow individuals to contribute a portion of their pre-tax income, which grows tax-deferred until retirement. Contributions to these accounts can be invested in a variety of assets, such as stocks, bonds, and mutual funds. In retirement, the accumulated funds in these accounts can be withdrawn, subject to certain rules and taxes, to provide income.

4. IRAs and Roth IRAs: Individual Retirement Accounts (IRAs) and Roth IRAs are personal retirement accounts that individuals can open on their own. Traditional IRAs offer tax-deferred growth, where contributions may be tax-deductible, but withdrawals in retirement are taxed as ordinary income. On the other hand, Roth IRAs provide tax-free growth, where contributions are made with after-tax money, but qualified withdrawals in retirement are tax-free. IRAs and Roth IRAs offer individuals more control over their retirement savings and provide additional options for generating income in retirement.

5. Annuities: Annuities are financial products offered by insurance companies that provide a guaranteed income stream in retirement. Annuities can be purchased earlier on, typically with a lump sum payment or regular contributions, and in return, the insurance company promises to provide regular payments either for a fixed period or for the rest of the annuitant’s life. Annuities can offer a sense of security and longevity protection, but it’s important to carefully consider the terms, fees, and payout options before purchasing them.

6. Personal Savings and Investments: Personal savings and investments include the funds individuals have set aside from their earnings throughout their lives. These savings can be held in bank accounts, such as savings or money market accounts, or invested in brokerage accounts where individuals can buy stocks, bonds, mutual funds, or other investment vehicles. Personal savings and investments can be an important source of retirement income, as they provide flexibility and the potential for growth or income generation based on the individual’s investment strategy.

7. Real Estate and Other Investment Properties: Real estate and other investment properties can serve as a source of retirement income. This includes owning rental properties that generate rental income or selling properties for a profit. Real estate can provide both income and potential appreciation over time. However, managing rental properties can be time-consuming, and the value of real estate can fluctuate. Proper due diligence and understanding of the real estate market are crucial for effectively utilizing this source of retirement income.

Retirement Savings & Investments

How much one needs to save? A popular rule of thumb is that one should save 10%-15% of pretax income into a retirement plan account such as a 401(k) or IRA account. Similarly, one can save and invest in their after tax brokerage or bank accounts. See Retirement Savings: How Much Should You Save For A Comfortable Retirement Life? for more detailed discussions.

Retirement Spending

In general, one can expect a lower expense in retirement than when working. A rule of thumb is that it’s about 70%-85% so called retirement replacement ratio.

An safe withdrawal rate (SWR) for retirement spending is how much you can withdraw from your savings so that the savings will not be deplete during your retirement. A popular rule of thumb is so called 4% SWR: it means you can expect to withdraw 4% of your savings every year so that it can last 20 to 30 years. If investing properly in a diversified asset allocation portfolio, one can expect the savings can still retain its purchase power after 20 to 30 years spending. There are also other withdrawing strategies such as floor and ceiling strategy.

See the following articles for more detailed discussion:

• Smart Cash Management: Can I Just Withdraw From My Bond Portfolio?
• Fnancial Independence & Early Retirement 
• Retirement Spending: Your Portfolio’s Volatility Matters

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