If you\u2019re a Boomer (born 1946-1964), you\u2019re either rapidly approaching retirement or you\u2019re already retired. You\u2019ve spent many years saving for retirement. While saving isn\u2019t easy \u2013 just look at the dismal savings rate for most Americans as evidence \u2013 transitioning from saving to spending is even more challenging. <\/p>\n
Once you stop working and earning an income, you\u2019ll need new sources of income to maintain your desired lifestyle. There are a variety of ways to create income in retirement. Let\u2019s review the most common ways, and assess them for safety, duration, tax efficiency, and whether they\u2019re adjusted for inflation.<\/p>\n
In this review, we\u2019ll explore Social Security, employer sponsored retirement plans, traditional IRAs and Roth IRAs. In a coming review, we\u2019ll look at part-time work, small business installment sales, rental property income, annuities, life insurance, charitable gift annuities and reverse mortgages.<\/p>\n
Your most attractive source of income in retirement<\/strong><\/a> is Social Security. The benefit you\u2019ll receive is directly related to your earnings history. The more you earned and the longer you did so, the greater your benefit. <\/p>\n Your Social Security benefit is considered \u201cnormal\u201d when you reach your full retirement age<\/strong><\/a> (or \u201cFRA\u201d). Depending on when you were born, your FRA is somewhere between age 66 and 67.<\/p>\n You can elect to begin receiving your benefits as early as age 62 but, if you do so, your benefits will be permanently reduced by a small percentage for each month you retire before your FRA. Alternatively, you can delay receiving your benefits up to age 70, in which case your benefits will be permanently increased by a small percentage for each month you delay. <\/p>\n Your Social Security income is guaranteed by the federal government. While you may be concerned about the solvency of the Social Security system, it\u2019s extremely unlikely that Boomers will end up receiving less income than promised. <\/p>\n Your Social Security benefit will be paid for as long as you live. Further, it will be increased for inflation<\/strong><\/a> throughout your retirement. <\/p>\n Your overall financial situation will determine whether your Social Security benefit will be subject to taxes. You should work with a tax professional and financial planner to minimize or avoid paying taxes on your Social Security income.<\/p>\n If you worked for a large corporation or a government entity, you may be eligible for a defined benefit pension when you retire. Your benefit will be calculated using a formula based on your salary history and the length of your employment with the plan sponsor. When you retire, you\u2019ll receive an income that is paid for life (i.e. an annuity income stream). If you\u2019re married, you\u2019ll most likely want to take the \u201cjoint-and-survivor\u201d annuity option, which will ensure that your spouse or partner receives part or all of your benefit if you predecease them.<\/p>\n These plans are generally safe, because they\u2019re insured by the federal government through the Pension Benefit Guaranty Corporation (the \u201cPBGC\u201d). So, if your corporate employer defaults on its obligation to pay you, the PBGC will step in and pay most or all the benefit your employer promised. Public pensions are not guaranteed, however. But, there’s rarely been a default of a government entity.<\/p>\n Income from a defined benefit pension plan is subject to ordinary income tax, and the payments may not be indexed for inflation.<\/p>\n Most employers, even small ones and non-profits, offer some kind of qualified retirement plan. These plan meet requirements of the Internal Revenue Code of the Internal Revenue Service. Your employer sponsors the plan and receives some tax benefits, and you receive certain tax benefits as a participant. 401(k) and 403(b) plans are the most common types of defined contribution plan.<\/p>\n As an employee, you can make contributions to your account through payroll deductions. Your contributions either a fixed dollar amount or a percentage of salary per pay period. In addition, your employer may match a portion of your contributions. Your participation in the plan is voluntary, and there are limits on how much you may contribute<\/strong><\/a>.<\/p>\n Defined contribution plans are participant-directed, which means that you\u2019re responsible for deciding how you\u2019d like your account invested. As the plan sponsor, your employer will have created an investment menu comprised of mutual funds, exchange-traded funds, target-date funds, and\/or retirement date funds. Some plans will allow you to invest \u201coutside the menu\u201d using a self-directed brokerage account.<\/p>\n When you retire, you\u2019ll most likely roll over your defined contribution account into an Individual Retirement Account (or \u201cIRA\u201d) in your name. This type of roll over is tax-free. You\u2019ll then be able to take income distributions from your IRA when you\u2019re ready. You can start taking penalty-free distributions as early as age 59 \u00bd. Once you turn 72, you\u2019re required<\/strong><\/a> to begin taking so-called \u201crequired minimum distributions<\/strong><\/a>\u201d.<\/p>\n Unlike with a defined benefit plan, there are no income guarantees with a defined contribution plan. <\/p>\n The distributions from your IRA are considered ordinary income. How long you\u2019ll be able to take distributions from your account before it\u2019s depleted will depend on the size and frequency of the withdrawals, as well as the performance of the investments in your account.<\/p>\n Your employer may also offer a so-called \u201cdeferred compensation\u201d plan, which allows you to postpone receiving some portion of your income in any given year into the future. These plans are considered \u201cnon-qualified\u201d because they don\u2019t fall under the traditional qualified plan rules. These plans are typically offered to allow highly compensated employees the ability to save more than is allowed under a traditional qualified retirement plan.<\/p>\n The income you defer into a non-qualified plan is held by your employer and isn\u2019t subject to taxation until you receive it. While your employer retains this income, it isn\u2019t protected from loss \u2013 it\u2019s considered an asset of the company and therefore at risk in case of bankruptcy. There have been instances in which non-qualified deferred compensation plans have been seized by an employer\u2019s creditors. In contrast, qualified plans are protected by the Employee Retirement Income Security Act (\u201cERISA\u201d). <\/p>\n Typically, in the year you elect to defer income into the plan, you\u2019ll also need to specify when you\u2019d lie to receive it. For example, you may elect \u201clump sum at retirement\u201d, or \u201c10 equal instalments beginning at retirement\u201d. Most plans will not allow you to change the election once it\u2019s made. When you receive distributions from the plan, they\u2019ll be taxed as ordinary income. The distributions won\u2019t be indexed for inflation. <\/p>\n Earlier, we mentioned IRAs. You may be able to contribute to an IRA in addition to deferring salary into your employer-sponsored retirement plan. The IRS has rules about who\u2019s eligible to contribute to an IRA. There are also limits on how much you may contribute each year<\/strong><\/a>. Contributions to a traditional IRA are generally tax-deductible.<\/p>\n IRAs offer tax-deferred growth, which means you\u2019ll pay taxes on your investment gains only when you take distributions. As we noted above, those distributions are subject to ordinary income tax.<\/p>\n You have virtually unlimited investment options in your IRA \u2013 individual stocks and bonds, mutual funds, exchange-traded funds, and more. There are no income guarantees with IRAs, as we noted before. The size and frequency of your withdrawals, together with the account\u2019s investment performance, will determine how long your money lasts. Your distributions aren\u2019t automatically indexed for inflation.<\/p>\n Unlike a traditional IRA, a Roth IRA is funded with after-tax contributions. The IRS has rules about who\u2019s eligible to contribute to a Roth IRA, and there are also limits on how much you may contribute each year<\/strong><\/a>. <\/p>\n Roth IRAs offer tax-free growth. You won\u2019t pay tax on your investment gains inside the account, and distributions from a Roth IRA are generally tax-free. <\/p>\n Unlike with a traditional IRA, there are no mandatory distribution rules for Roth IRAs. But, if you decide to take distributions, their size and frequency, together with the account\u2019s investment performance, will determine how long your money lasts. <\/p>\n If you need help putting together your income plan for retirement, consider working with a Certified Financial Planner<\/strong><\/a>\u2122 (CFP\u00ae), Certified Public Accountant<\/strong><\/a> (CPA) or a Chartered Financial Consultant\u00ae (ChFC\u00ae) or an RICP (Retirement Income Certified Professional\u00ae). Advisors who hold these designations have met rigorous educational, experience and ethics requirements.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" If you\u2019re a Boomer (born 1946-1964), you\u2019re either rapidly approaching retirement or you\u2019re already retired. You\u2019ve spent many years saving for retirement. While saving isn\u2019t easy \u2013 just look at the dismal savings rate for most Americans as evidence \u2013 transitioning from saving to spending is even more challenging. Once you stop working and earning […]<\/p>\n","protected":false},"author":2,"featured_media":6236,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_mi_skip_tracking":false,"footnotes":""},"categories":[3,5,152,11],"tags":[13,14,86,165,117,122,126,140],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/6235"}],"collection":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/comments?post=6235"}],"version-history":[{"count":0,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/6235\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media\/6236"}],"wp:attachment":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media?parent=6235"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/categories?post=6235"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/tags?post=6235"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Employer Sponsored Defined Benefit Pension Plan<\/strong><\/h2>\n
Employer Sponsored Defined Contribution Plan<\/strong><\/h2>\n
Non-Qualified Employer Sponsored Retirement Benefits<\/strong><\/h2>\n
IRAs<\/strong><\/h2>\n
Roth IRAs<\/strong><\/h2>\n
Getting Help with Retirement Income Planning<\/strong><\/h2>\n
If you\u2019re looking for help with retirement income planning, contact us today to see how our team at Springwater Wealth can help you.<\/strong><\/a><\/span><\/h2>\n