Planning Your Retirement Paycheck
Planning for retirement often focuses on things that happen before you retire. That’s perfectly fine if you still have several years to go. But as many people near retirement, focus shifts from accumulation to distribution, and practical questions, such as, how will my retirement money get to me? In what amounts? In what accounts? On what dates?
A key but often-neglected part of retirement planning is ensuring “paycheck continuation.” This ensures you receive funds in a way that fits the rhythms of your life. Here are some steps to discuss with your advisor:
Determine the pieces that make up your paycheck
For many people this will include Social Security, plus some combination of distributions from a 401(k), IRA accounts, and perhaps a pension or other assets. Calculating how much to take from each source to create your “retirement paycheck” can be complex. Perhaps you choose to draw Social Security at a later age to get a bigger payout – where can more funds be drawn from in the meantime? Some retirement funds may be taxed when you use them, other sources may be pre-taxed. A skilled advisor can help you navigate the complexities.
Plan how and when your paycheck comes
If you’re used to having a certain amount of dollars show up in a certain account every two weeks, you may be surprised when some funds, such as Social Security, are paid monthly. Being unprepared can result in monthly budget shortfalls, and even missed bill payments. Work with your advisor to craft schedules and routines that get money where its needed, on time.
Ensure flexibility with a standing line of credit
If a 401(k) or similar defined-contribution account is your main retirement nest egg, consider setting up a line of credit you can tap when needed. Withdrawing a significant amount from a defined-contribution account to cover unplanned expenses can result in a significant tax bill. A line of credit will let you address an emergency or seize an opportunity without income tax implications, thus buying you time to figure out the best way to pay for it.
Remember to factor in healthcare
Healthcare will likely be one of your largest (and growing) costs in retirement. First, be sure to budget enough for insurance. Second, provide yourself the financial flexibility to pay for unexpected out-of-pocket costs (such as a health savings account (HSA) or the line of credit mentioned above.) Third, if you do have money saved in an HSA, you can include that as a “paycheck” source to cover recurring health care costs, such as prescription drugs.
Don’t wait – talk about the big stuff early and often
Eliminate stress by proactively addressing topics like long-term care and how to fund it, your charitable intentions, and naming beneficiaries. Meet with your advisor regularly in retirement to tweak your paycheck and review your spending. Investment adjustments may seem important, but during retirement they are just a small part of the conversation.
Alerus advisors have the expertise and experience to help you navigate the interlocking pieces of your life – caring for parents, supporting children, planning for yourself – in a way that can help you achieve balance. Each person’s answer may be different, but one thing is true for all: The more time you take to plan carefully for retirement, the more comfortable and confident you will be.