Turning retirement savings into disposable income is critical to people nearing retirement. We are all accustomed to building nest eggs but what we do with these savings once we retire will play a crucial role in whether or not we are able to meet our financial obligations in retirement.
According to Government Accountability Office (GAO), about one-third of 401(k) plans have retirement-income withdrawal option and about one-quarter offer annuity. While GAO makes recommendations to improve this situation, creating a reliable and sustainable retirement income could still be a challenge.
Ensuring that your savings and investments sustain you in your golden years requires meticulous planning, budgeting, and execution.
Here are five steps to help you turn your retirement savings into retirement income:
Have an Emergency Savings
Retirement is good, you don’t have to worry about job loss or meager hiring anymore, but emergencies such as car repair, medical bills, and leaky roofs still happen in retirement, and if they do, the last thing you want to do is sell assets for a loss or go into debt just to pay the bills.
You need to set aside money for emergencies. If you’re over 60, you may have a couple of options to deal with this issue. One option for funding emergencies is an annuity. Annuities provide a steady stream of income during retirement.
Calculate How Long Your Nest Egg will Support You
To be able to project how much to withdraw from your retirement savings each year without depleting it prematurely, you have to figure out how long you will live.
Life expectancy is not a good barometer because it fluctuates with age. The risks we face change throughout our lifetimes, meaning that many people will live shorter or longer than they had thought. Running an expert lifespan calculator, such as Longevity Illustrator, can help you determine how long you will live.
With 401(k), you really don’t have to worry about paying taxes. You can choose to pay taxes now and enjoy future tax-free income.
If you have a mix of tax-free accounts such as Roth IRA and pre-tax account such as 401 (k), you can always withdraw from your pre-tax account first to cover personal exemptions and deductions; this will allow you to withdraw the money tax-free.
Ensure You Have Enough Guaranteed Income
If you know that the income you’ll receive from your pension and Social Security will not be enough to cover the essentials, you may be better off converting a portion of your investments to guaranteed lifetime income.
Many insurers are offering various types of annuities that serve different purposes. If you want an annuity that guarantees monthly payments or an income stream for life, your best option is an immediate annuity or longevity annuity.
An immediate annuity allows you to begin receiving monthly payments for the rest of your life once you pay a lump sum to an insurer. With longevity annuity, you will have to wait until 10 or 15 years after retirement to start receiving payment.
Pay Off Your Debt
Paying off your debts especially paying off your mortgage can be a good financial move because the amount you would save per month in paying off your mortgage is likely to be higher than what you would earn if you invest that same amount of money. Also, if you have had your mortgage for a while, your mortgage tax break is likely to be much less.
Have Questions? We Have Answers
We help everyday people just like you plan for the future. If you seek to convert your retirement savings into income – act now. The longer you wait to secure your financial future only increases the challenge of meeting your financial goals in your golden years. As a fiduciary advisor – David Ortiz Advisors is obligated by law to place your financial objectives first – which removes any conflict of interest with respect to commissions, product pushing, etc. We have helped thousands of individuals and families plan for retirement over the last 29 years. If you have questions about your personal situation, retirement outlook or would simply would like to get a 2nd opinion – give us a call or send us a message through our website.