Most people put so much focus and energy into the wealth-accumulation portion of retirement planning, such that planning for post-retirement income and spending kind of falls by the wayside.
Whether or not you realize it, you’re going to need a strategy for dealing with your expenses and income in retirement, one that ensures not only that the expenses never exceed the income but also that you don’t outlive your funds.
There are lots of things you must take into consideration as part of your retirement income plan, many of which can be variable, like inflation, the cost of health care, and your life expectancy. The goal is to establish a stress-tested plan that accounts for these variables and will provide you with the most tax-efficient, yet reliable and sustainable income stream during your golden years.
Social Security will definitely be part of any retirement income plan, and it offers benefits no other retirement savings can, like guaranteed income you can’t outlive, protection against inflation, and so on. But since the average retiree only receives about 40 percent of his or her pre-retirement income, Social Security by itself will not be enough to cover your expenses in retirement. It’s a great supplementary source of income in retirement, but it’s meant to just bridge the gap, so to speak, between your other retirement savings and unexpected expenses.
According to the 4-percent rule, if you can comfortably live on withdrawals of 4 percent from your retirement savings (adjusted each year for inflation), it’s relatively safe to assume that you will not run out of money for at least 30 years. Experts agree though, that the 4-percent rule may not apply equally to everyone, since one person’s magic number might be different from another’s.
Annuities can provide a guaranteed stream of income for retirees that they can’t outlive. Also, studies show that retirees with guaranteed income spend twice as much annually, when compared to retirees whose only withdrawal income comes from their investment portfolio.