After working hard for decades, you’re ready to retire. While some people have more than one source of income while employed, most individuals have just one. However, heading into retirement, you’ll likely get income from several sources. Those include any IRAs, investment accounts, Social Security benefits, and for some, a pension.
Regardless of the pay schedule, getting income from multiple sources can feel overwhelming. Along with your income, you also need to figure out how taxes might affect some or all of the money.
Your retirement income will fall into one of two categories: regular and potential.
Regular Retirement Income
As “standard” methods of income after retiring, you can think of these as a paycheck per se. You’ll receive money according to a set schedule for the remainder of your life.
Social Security Benefits
At the age of 62, you can start getting Social Security benefits. However, financial experts advise people to wait until they’re closer to 70 to retire if possible since this increases the number of their benefits. Either way, the government calculates your income while working to determine the specific payout.
The federal government distributes this form of retirement income monthly. Also, people who receive these benefits enjoy a cost of living increase each year.
Even after retiring, a lot of people continue to work, at least part-time. This gives them something to do and makes them feel they’re a valued contributor to society. For another thing, this is a great way to increase your retirement income.
Two specific types of pensions count as regular retirement income.
Similar to Social Security, this pension pays out monthly for the remainder of your life. It’s also based on the amount of money you earned while working. However, this is rarely offered. For those who have this kind of pension, most opt to take the money as an annuity.
Annuitized-Defined Contribution Plan
A 401(k) plan is an example of this type of pension, which is commonly offered. Employees make contributions to the plan while working. At that same time, the employer pays into the plan. Depending on the company, some pay a percentage of what the employee saves, while others match the contribution dollar for dollar.
If you’re fortunate, your employer will let you take the money as an annuity. One benefit is that you don’t have to make any tough investment decisions. Another benefit is that you have a source of income for life. The downside is that annuitizing this pension usually includes hefty fees, and you have little to no protection against inflation.
Potential Retirement Income
To take advantage of this income, you need to make scheduled withdrawals or take money out as needed.
Investments and Savings Accounts
Depending on your situation, you might have just one or several taxable investment accounts. As for a savings account, it’s best to maintain enough money to cover at least three to six months of expenses.
Tax Advantage Accounts
For either a defined-benefit and defined-contribution account, there’s a chance your employer will allow you to take the money as a lump sum rather than an annuity. That way, you can roll all the money into an IRA. As a tax-deferred investment, you wouldn’t pay taxes until you withdraw money or if you access the funds right away.
This is a great option if you need more retirement income and have equity in your home. With this, your mortgage company would pay you a portion of the equity each month. The positive aspect of this is that as a loan, the money isn’t taxed. The negative is that if you sell the home or after you pass away, the loan must get repaid.
Running Retirement Projections
You can use a financial planner to build a financial and retirement plan or do it yourself using online retirement applications such as WealthTrace. Retirement apps like WealthTrace allow you to link your investment accounts, run detailed projections on your finances, and view your retirement income by source in every year. This type of software can help most people avoid the stress of not knowing when or if they can retire.
It’s All About Financial Management
No matter the sources of your retirement income, you want to manage your finances correctly. Start by adding all of your monthly expenses. Include housing, groceries, utilities, transportation, medication, doctor’s visits, and clothing. Deduct the total from the amount of regular retirement income you get.
If you don’t have enough money, try to eliminate some unnecessary spending. Although you want to enjoy your “golden years” to the fullest, you might need to cut back on dining out, traveling, and entertainment. Of course, you can withdraw money from your investments or savings account.
However, before you do that, develop a solid plan. For starters, take money out of taxable accounts first, followed by the tax-free investment accounts and then tax-deferred accounts. Ultimately, you want your investments to grow tax-free for as long as possible.
As a retiree, you also need to properly manage your taxes. If the federal government doesn’t take taxes out of some of your retirement distributions, you’ll need to file your estimated taxes quarterly. Sometimes local and state governments don’t tax retirement income, and sometimes they do.
As for distributions to a taxable investment account, the amount of taxes depends on whether you sold them as short- or long-term capital gains. The government treats withdrawals from tax-deferred accounts as standard income. One important note: If possible, always roll any lump-sum distribution into a tax-deferred account. That way, you’ll avoid getting hit with big taxes.
To properly manage your retirement income, also focus on the Required Minimum Distributions, or RMDs. These distributions come from all retirement accounts, excluding a Roth IRA. However, you can’t get them until the age of 72. Another rule is that the distribution amount has to come close to the balance recorded at the end of the prior year. That figure is then divided by your life expectancy.
Solid income in retirement can help one avoid the ups and downs of the financial markets. Make sure your income will meet your needs.
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