Maximizing Your Retirement Income

We all reach the point in our lives where the primary goal becomes less about accumulation and more about using the collection of acronyms – IRA, 401(k), 403(b) – to help provide for our retirement lifestyle. After we retire, we will need an income that keeps pace with inflation and allows a sense of confidence.

The Social Security Administration has found that people with retirement incomes of more than $40,000 a year derive about 60 percent of it from personal resources and earnings. Pensions, for those lucky enough to have one, provide another 21 percent.

A tremendous burden is on the individual to make sound financial decisions that involve complex investment and tax issues. The decisions you make in the years just preceding and after retirement can have a huge effect on income for the rest of your life. A few key factors to consider are:

• Longevity. With advances in medical technology, people are living longer. In fact, the average 65-year-old will live to age 83, and one spouse in a marriage has a good chance of living into their 90s, according to the Society of Actuaries. Someone who retires today at 65 may need to plan for the next 25 to 30 years.

• Withdrawal rates. Those contemplating retirement face the question of how much they can spend without running out of money. Until recently, many people optimistically assumed they could spend 9 or 10 percent of their nest egg each year. However, longer term studies show that safe spending levels may be around half that amount.

• Inflation. Even at the moderate levels we have witnessed recently, inflation is a significant factor over time. For instance, at 3 percent inflation, $50,000 today will only be worth about $24,000 in 25 years.

• Asset allocation. One of the most crucial decisions is finding a suitable mix of investments that produces the desired level of income, focuses on buying power over time and minimizes volatility. What might have worked well during the accumulation years might not work during retirement. Strategies such as holding concentrations of an employer’s stock or overly aggressive or conservative investments may jeopardize the plan over time.

• Health care. As health care costs skyrocket, many retirees are forced to allocate a larger portion of their retirement savings to provide for these needs. Medicare only covers so much, and even those fortunate enough to have coverage from a former employer often face high premiums and deductibles. Neither of these sources usually covers long-term care costs, which can be astronomical.

Fortunately, solutions exist that are designed to help with all of these issues. The key is to develop a sound game plan early and to make adjustments as needed.