You’ve worked hard to build a bright future for yourself and your loved ones. Now, it’s finally almost time to begin your next chapter — retirement.
As you think about when to retire, it’s important to make sure you have an income strategy that fits your vision for the future. First, consider the factors that impact your retirement savings by reviewing the facts:
The average American lifespan is 79 years.1
A retiring couple may need $285,000 for healthcare expenses in retirement.2
The historical average annual inflation rate is 3%.3
Calculate how much retirement income you’ll need
Rethink your budget with retirement in mind. Retirement readiness starts with a clear vision of your ideal lifestyle. According to most financial professionals, you’ll probably need about 85% of your pre-retirement income to maintain your lifestyle after leaving your job.
These tips can help you get started assessing your income needs:
- Track your spending for 90 days to get a realistic view of your spending. Use this budget worksheet to get started.
- Based on your plans for retirement, will your expenses change? Perhaps you plan to spend more money on travel or hobbies.
- Budget for healthcare expenses. Even with Medicare, the average couple may need substantially more to pay for healthcare in retirement.
- Consider how long you may spend in retirement. This Life Expectancy Calculator may be helpful.
Determine your income sources
Next, consider potential income sources so you can develop a strategy for generating income. Your annual retirement income may come from several different sources, including:
Social Security benefits can be an important source of retirement income. According to the Social Security Administration, the maximum benefit amount covers about 40% of an average retiree's expenses.4 Learn more about Social Security.
For many people, your workplace retirement plan may be your most important source of income in retirement. Maximize the benefits by contributing as early as you can and regularly increasing the amount you save. Your employer may match a portion of the amount you contribute to your plan, so make sure you're saving at least enough to get the full match. Understand your distribution options when retiring.
In the past, Medicare covered most retiree healthcare needs. But with people living longer today, out-of-pocket costs medical costs can be substantial for retirees. For the age 65-to-74 demographic, out-of-pocket health spending amounts to 42% of total income.5 So, while Medicare may cover part of your healthcare in retirement, you may also need to explore other options.
A Health Savings Account (HSA) is a medical savings account that may be offered to people enrolled in high-deductible health plans. If it’s available, money you've saved in an HSA can serve as an additional source of funds for healthcare expenses. These tax-advantaged savings may be most helpful if you wait to withdraw and use the money during retirement.
If you're looking for additional ways to generate retirement income, consider the following options:
- Individual Retirement Account (IRA): Traditional or Roth contributions may offer you tax advantages while you save more for retirement.
- Part-time job: Retirement may be a great opportunity to pursue something you enjoy professionally. Maintaining a steady stream of income to cover daily needs allows your savings more time to grow.
- Advice from a financial professional: He or she may help you consider these and other options and help you come up with a strategy that's best for you.
Make your savings last through retirement
It's important to review your portfolio’s asset allocation on a yearly basis. A portfolio based on a sound investment strategy can help create retirement income and safeguard your savings against inflation.
Asset growth – This can help offset inflation and make it easier to ensure that your savings last throughout retirement.
Asset preservation – You can access low-risk investments or pass them on to your heirs.
Guaranteed sources of lifetime income – You can achieve guaranteed lifetime income by investing in an annuity. Some employer-sponsored retirement plans also offer guaranteed income features.
The longer you leave your assets in tax-advantaged accounts, the longer they have to grow. Learn the rules that govern withdrawals for each of your account types before you start taking distributions — you’ll want to be as tax-efficient as possible.
First, consider taking distributions from your taxable accounts — or your regular savings.
Next, make withdrawals from tax-deferred accounts, including traditional Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans.
Finally, consider withdrawing from your tax-free accounts — such as Roth IRAs and other Roth savings.
Decide on your retirement timeline
Timing is an important piece of your retirement strategy. Many people make the mistake of deciding to retire with no financial plan in place. If you still have concerns over whether you’re on track to reach your savings goals and achieve the retirement you envision, you may want to reflect on your retirement expectations and consider whether an alternate approach is best for you, such as:
- Adjusting your target retirement date.
- Transitioning to part-time at your current job.
- Part-time work in another field.
Planning for retirement?
When you’re ready, these tips and reminders can help you make sure the transition to retirement goes as smoothly as possible. Review the pre-retirement checklist.
Not sure if you’re retirement ready?
We’ve got you covered. Log in and use the retirement income estimator to see if your savings are on track to meet retirement goals. If you have additional questions, consider speaking to a financial professional.