Key Takeaways:
- Building an income plan starts with comparing anticipated expenses to guaranteed income (Social Security, pensions) to find the gap your portfolio needs to cover.
- Investing doesn’t stop at retirement — dividing money by when you’ll need it lets short-term funds stay conservative while long-term money keeps growing.
- Traditional 401(k)/IRA withdrawals are taxed as income, Roth withdrawals are tax-free, and RMDs begin at age 73 (75 for those born in 1960 or later).
- Healthcare and long-term care can become major retirement expenses — options range from self-funding to long-term care insurance to hybrid life insurance policies.
- A will, medical power of attorney, and updated beneficiary designations round out a plan that protects both your savings and your family.
The Building Blocks of a Retirement Plan That Actually Lasts
Building a retirement plan involves more than allocating part of your paycheck to a 401(k). Once you’re out of the workforce, you need a plan for turning your savings into income, investing for the years to come, managing taxes, and covering healthcare costs. Here’s what you need to have in place to feel more prepared for what’s ahead.
Build an Income Plan
Start by determining your anticipated monthly expenses (housing, food, insurance, travel, etc.). Compare those expected expenses with guaranteed sources of income, such as Social Security and a pension. The difference between guaranteed income and anticipated expenses is the amount your savings will need to cover.
If you spend $7,000 a month and get $3,500 in guaranteed income, you’ll need $3,500 from your portfolio. Once you know that number, consider which investment accounts you’ll use to cover the gap.
At this stage of planning, some workers decide to delay Social Security to qualify for a larger monthly benefit or adjust their retirement date to improve financial stability.
Create an Investment Plan
Some people mistakenly think investing ends in retirement, but your money may need to support you for decades, so long-term growth is still important.
However, retirement can also change how much risk you can afford. Consider dividing your money according to when you’ll need it. You could hold money for short-term expenses in lower-risk options while keeping money for the future invested for long-term growth.
Taxes Should Be Part of Your Plan
Your investment accounts are all taxed differently. Withdrawals from traditional 401(k)s and IRAs are counted as regular income and generally taxable. Roth withdrawals are tax-free. Regular brokerage accounts are taxed at lower capital gains rates.
Then there are Required Minimum Distributions (RMDs). Starting at age 73 (75 if you were born in 1960 or later), these mandatory withdrawals can increase your taxable income and push you into a higher tax bracket.
One way to possibly get ahead of that is a Roth conversion, which could help some retirees reduce future RMDs and create tax-free retirement income. But you generally owe income tax on the amount converted, so timing is important. The best time to do this is usually early in your retirement, before Social Security or RMDs begin. If you’re considering a Roth conversion, talk to a tax professional who can help you determine the best timing for you.
Where you hold different investments also matters. Choosing which investments to keep in each type of account can help you pay less in taxes over time. A tax professional can help you sort this out, too.
Prepare for Healthcare Costs
Healthcare can become one of the biggest retirement expenses. Do you know how you’ll get coverage if you retire before Medicare eligibility? Do you know what you’ll pay once Medicare begins? How will you make sure you’re not overpaying for premiums?
Your income can affect Medicare premiums, so managing your taxable income can help keep them down.
According to the U.S. Department of Health and Human Services (HHS), most Americans will need some form of long-term care, and those costs can be substantial. Your options include setting aside enough funds to self-fund care, purchasing long-term care insurance, or considering a hybrid life insurance policy that includes long-term care benefits.
None of these options are one-size-fits-all. The right fit depends on your age, health, and finances.
Get Your Legacy and Estate Plan in Order
This is about making things as easy as possible for the people and loved ones you leave behind. Make sure you have the basics done: a will, a medical power of attorney, and designated beneficiaries on every account. Update these documents after any major life changes, store them securely, and make sure your family knows where to find them.
Creating a comprehensive retirement plan will help your savings last longer, and you’ll feel more confident about the financial future you’ve spent years preparing for.
