09 Nov

Where Does Your Paycheck Come From in Retirement?

November 09, 2015

Have you asked yourself where your paycheck will come from in retirement? Once taxes  are considered, will it be enough to live the way you want? For most of us, starting and ending our career with the same company is a thing of the past, as are the days of pension checks funding the majority of our retirement.  For better or worse, most of us now bear the responsibility for our own retirement planning and determining how our savings will be invested. Possibly more challenging, we are responsible for unwinding our nest egg in a tax efficient manner, with hopes of never running out of money.

Income in retirement may come from numerous sources, with the most common being social security, withdrawals from a company retirement plan, personal savings, and/or investment accounts. Retirement planning is not an easy task and can be confusing. When it comes to retirement account names and tax law, we have an alphabet soup of seemingly random numbers and letters, each meaning something slightly different. Taxation on the source of your paycheck can vary greatly, as can the rules, so a basic understanding of taxes can help avoid surprises during retirement.

Social security retirement benefits will be a source of income for those not subject to the recent changes in who can file and when. For the rest of us, there’s much more uncertainty as to how much we will receive and when we will receive it. Either way, social security will continue to be an important part of the retirement income puzzle for many retirees.

In addition to social security, many retirees withdraw from an investment portfolio to provide adequate income in retirement. Selling investments from a portfolio may be done on an “as needed” basis or on a specified schedule. A typical portfolio can be made up of many types of accounts including company sponsored retirement plans, individual retirement accounts, taxable investment accounts, and insurance products. Each can hold various investment types, but how each account is taxed varies. Retirees who have been thoughtful in planning ahead may have accounts that will be taxed advantageously. In addition, strategically choosing the types of investments within each account (called asset allocation) may help in providing a particularly tax-efficient income stream in retirement.

When estimating how much can be withdrawn each year from your portfolio, carefully consider your portfolio’s investment “mix,” total investment costs, and how long withdrawals may be needed. You should have a good understanding of the amount of risk being taken, and make sure this aligns with your goals, which should be carefully considered and regularly reviewed. Being too conservative may lead to a lower probability that withdrawals can be increased with inflation, or worse, your paychecks are no longer enough.

Your retirement income plan should be tailored to your financial and non-financial goals and should include careful investment, estate, and tax planning. With so many unknowns, planning for retirement can be difficult, stressful, and confusing. There are numerous “rules of thumb” to consider, but most don’t account for your unique circumstances, expectations, and goals. Stop and ask yourself, what is my ideal future? When do I want to retire, what do I want to accomplish, and how do I want to be remembered?  Are there values that I would like to pass on to my children or grandchildren? Whatever your answers may be, knowing where your paycheck comes from in retirement helps in determining if your ideal future is achievable.

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