When you’ve worked so hard over the course of an entire career to provide yourself and your family with a comfortable life and have also saved diligently by making sacrifices or contributing to an employer-sponsored retirement savings plan, you deserve to enjoy your golden years without having to worry about financial security.
During this retirement planning stage, most people immediately begin to think about how they can access their accumulated assets for steady, regular income. However, there are a few things you should consider before tapping into your retirement savings plan account.
- Evaluate your needs
The first step in any retirement income plan is to estimate how much income you'll need to meet your desired lifestyle. The conventional guidance is to plan on needing anywhere from 70 percent to 100 percent of your pre-retirement income each year during retirement; however, your amount will depend on your unique circumstances. While some expenses may decrease in retirement, others may rise. Thus, before you even think about how to tap into your retirement plan assets, you should have a concrete idea of how much you'll need to cover your basic needs and live comfortably according to your wishes and desired lifestyle.
Start by estimating your non-negotiable fixed needs—such as housing, food and medical care. This will help you project how much you'll need just to make ends meet. Then, you can focus on the things you desire—including travel, leisure and entertainment.
- Assess your sources of predictable income
Next, you'll want to determine how much to expect from sources of predictable income, such as Social Security and traditional pension plans. These could be considered the foundation of your retirement income.
A key decision regarding Social Security is when to claim benefits. Although you can begin receiving benefits as early as age 62, the longer you wait to begin (up to age 70), the more you'll receive each month.
The Social Security Administration (SSA) calculates your retirement benefit using a formula that takes into account your 35 highest earning years, so if you had some years of no or low earnings, your benefit amount may be lower than if you had worked steadily.
You can estimate your retirement benefit by using the calculators on ssa.gov, where you can also sign up to view your Social Security Statement online. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor and disability benefits, among other things.
Traditional pensions have been disappearing from employer benefit programs over the past few decades. If you're someone who stands to receive a pension benefit, this can significantly impact your flow of income in retirement. However, you need to be aware of your pension's features, like whether your benefit will remain steady throughout retirement or increase with inflation. When you sign up to start receiving benefits, you will likely also have choices about survivor’s benefits. While the higher current amount is attractive, it’s important to evaluate what your surviving dependents might need if you are gone.
If it looks as though your Social Security and pension income will be enough to cover your fixed needs, you may be well positioned to use your retirement savings plan assets to fund the extra things that you desire. On the other hand, if those sources are not sufficient to cover your fixed needs, you'll need to think carefully about how and when to tap your retirement savings plan assets.
- Understand your plan options
Upon leaving your employer, you typically have four options:
- Plans may allow you to leave the money alone or may require that you begin taking distributions once you reach the plan's normal retirement age.
- You may choose to withdraw the money, either as a lump sum or as a series of substantially equal periodic payments for the rest of your life, or you might use other withdrawal options offered by your plan.
- You may roll the money into an Individual Retirement Account (IRA). You'll want to carefully compare the investment options, fees and expenses of both your current plan and the IRA before making any sort of decision.
- If you continue to work during your retirement years, you may be able to roll the money into your new employer's plan. Again, be sure to compare plans before making any decisions.
- Compare tax deferred and tax-free
If you have both tax-deferred and Roth accounts, consider that the taxable portion of distributions from tax-deferred accounts will be taxed at your current income tax rate, while qualified withdrawals from Roth accounts are tax-free under current tax law. For this reason, general guidelines often suggest tapping tax-deferred accounts before Roth accounts to allow those accounts to potentially continue growing free of taxes.
Roth IRAs, Roth 401(k)s and 403(b)s—beginning in 2024 thanks to SECURE Act 2.0—are not subject to required minimum distribution (RMD) rules until after your death. Conversion from traditional IRAs and other qualified retirement accounts might be a good strategy if your taxable income decreases at retirement. Keep in mind, however, that a conversion will trigger an immediate tax consequence on the taxable portion of the converted assets, which may result in a larger tax bill from the federal government.
- Seek professional assistance
Determining the appropriate way to tap your assets can be challenging and should take into account a number of factors. These include not only your tax situation, but also whether you have other assets you'll use for income, your overall health and your estate plan. In this instance, seeking help from a financial professional can help you make sense of your options and understand what strategies best align with your unique needs, goals and values.
The professionals at Busey Wealth Management know that planning for retirement can be a complex and frustrating task, so they are here to help you prepare. To learn more or to find an advisor near you, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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