How do I create a retirement income plan?

Retirement planning has five steps: knowing when to start, calculating how much money you'll need, setting priorities, choosing accounts and choosing investments .

Can you set up your own retirement account?

Open a 401(k) On Your Own If you are self-employed and do not employ others you are actually eligible start a 401(k) plan for yourself as a solo participant . In this situation, you would be both the employee and the employer, meaning you can actually put more into the 401(k) yourself because you are the employer match!

What's the best order for drawing your retirement income?

Minimize tax upfront: draw from less-taxed assets first. Withdraw first TFSA TFSA withdrawals are tax-free. Withdraw last RRSP/RRIF Income from your RRSP/RRIF is fully taxable. Reserve this for as long as you can, but remember that you must start drawing from your RRIF after the end of the year in which you turn 71!.

What are the three keys to your retirement income plan?

Three things to remember A retirement income plan should include guaranteed income, 1 growth potential, and flexibility .

What is the $1000 a month rule for retirement?

One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement .

Is $1,500 a month enough to retire on?

While $1,500 might not be enough for non-housing retirement expenses for many people , it doesn't mean it's impossible to stick to this or other amounts, such as if you're already retired and don't have the ability to increase your budget.

How much does a $50000 annuity pay per month?

Payments You Might Receive From a $50,000 Annuity A straight fixed annuity is the easiest type of annuity to calculate a payment from. This is because fixed annuities work like bonds. If you use $50,000 to buy a fixed annuity paying 5% per year, for example, you'll earn $2,500 annually or about $208.33 per month .

What is the first step in developing a retirement income plan?

Retirement planning starts with thinking about your retirement goals and how long you have to meet them. Then you need to look at the types of retirement accounts that can help you raise the money to fund your future. As you save that money, you have to invest it to enable it to grow.

Can I retire at 62 with $400,000 in 401k?

If you have $400,000 in the bank you can retire early at age 62, but it will be tight . The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.

How much income does $500 000 generate?

A $500,000 401(k) can generate different amounts of monthly income, depending on withdrawal strategies and market conditions. If following the commonly used 4% rule, it would provide an annual income of $20,000, or approximately $1,667 per month .

How to Create Your Own Retirement Income Plan - SmartReads by SmartAsset (2024)

How to Create Your Own Retirement Income Plan - SmartReads by SmartAsset (1)

It’s important to plan for your retirement income.One of the most overlooked aspects of retirement planning is that there are two steps to this process.

First there’s your savings plan – how you will build wealth and set money aside over time. This is, of course, critical. Then, there’s your income plan, or how you will withdraw and distribute your wealth while in retirement. This is every bit as essential, because it informs your saving and investing strategy as well as your lifestyle while in retirement.

So here are a few tips to help you build an income plan for your retirement.

For professional help developing a retirement plan, talk to a financial advisor.

Determine Your Budget

When you save for retirement, you want to set your goals based on your needs and lifestyle and work backwards from there. Essentially, how much money will you need each month to pay for costs of living? And what will it take to meet your wants and preferences?

This budget will depend on any number of factors. For example:

What are your local costs of living?
How much do you spend on housing and other fixed bills?
Do you want to enjoy more expensive hobbies, such as travel, or do you enjoy quieter activities?
What kind of medical needs should you anticipate?
Do you have goals for your family’s needs, such as children and grandchildren?

All of this is part of your math but, in general, a good place to start is the 80% rule. Your costs of living will drop somewhat in retirement, so a rule of thumb is that you will need about 80% of your current income to maintain your current lifestyle. So, say that you make $100,000 per year. You will want to plan for a retirement account that can generate $80,000 per year in reliable income.

Starting here will give you a specific goal to build towards, which is essential for long-term planning.

Note: It’s important to account for inflation in your income projections. A financial advisor can help you do the math.

Pay for the Essentials With Secure Income

From there, plan for two categories of cash outflows: bills and spending.

How to Create Your Own Retirement Income Plan - SmartReads by SmartAsset (2)

Your bills are the fixed, nondiscretionary costs that must be paid. This covers things like housing, utilities, food, medicine and other essential costs.

Plan to pay the bills with secure sources of income. Assets like Social Security, annuities and bond interest payments are all good options for this. If you are lucky enough to have a pension, that works too. Overall, you want to plan on using your predictable, secure and structured income to pay for the things that you need. That way, you won’t find yourself at the mercy of the markets when it comes time to pay your rent or property taxes.

Spending, on the other hand, would include more optional lifestyle costs. This covers things like entertainment, eating out, travel, hobbies, luxuries and any other nonessential costs that you could cut if you had to.

Plan to pay for your spending with less secure, portfolio-based income. Assets like stocks, bond returns (as opposed to interest payments), ETFs, mutual funds and real estate are all good examples of less secure assets. These are investments that you will hold, but they will fluctuate based on the market. You can rely on these assets to pay for your lifestyle, but can cut back during market downturns as necessary.

Talk to a financial advisor to plan an appropriate retirement budget.

Project Investment Growth Before Retirement and Beyond

You will need a plan for in-retirement growth, in addition to investment growth pre-retirement.

If all goes well, you will enjoy a long retirement. If nothing else, this means that inflation can take a very real bite out of your portfolio’s spending power. For renters who live in the city, housing costs will do the same thing. To prevent this, you need a portfolio that can grow at least as fast as the value of money.

How to Create Your Own Retirement Income Plan - SmartReads by SmartAsset (3)

Build this into your income planning.

For some retires, this will mean carving out a section of their withdrawals for reinvestment. While you cannot place investment returns into a tax-advantaged portfolio, you can certainly reinvest them in standard account. Anticipating some degree of reinvestment will let you build more security into your retirement portfolio, using assets like annuities and bonds to generate a more reliable income stream, while also anticipating more growth by rolling this income into growth-oriented products like an index fund.

However you do it, make sure not to forget about the need for growth. A financial advisor can help you determine what a reasonable rate of return is based on your goals and risk tolerance.

Plan for Taxes

Finally, do not forget to anticipate taxes in your income.

Many people forget that they will have to pay taxes on most sources of income while in retirement, including Social Security benefits. (Roth IRA accounts are the biggest exception to this.) So when they build a portfolio to produce $80,000 per year of income, say, they expect to have $80,000 on hand.

It doesn’t work that way. You can owe income taxes on most tax-advantaged retirement accounts, capital gains or income taxes on all standard portfolios, and benefit taxes on Social Security. So work with your financial advisor or accountant to get a sense of what those taxes will be in advance, so that you can know what you will pay on your planned income.

Remember, a financial advisor can help you build a robust retirement plan that accounts for taxes, inflation and other factors.

Bottom Line

Planning for your retirement income and withdrawals is an essential step in retirement planning. Make sure not to overlook this as you prepare your account, because it can help you structure your portfolio and build achievable goals.

Retirement Tax Tips

The IRS taxes different types of retirement income differently, based on the source and the nature of your portfolio. Here’s how they approach some of the most common retirement assets on the market.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

I am an expert in retirement planning with a deep understanding of the key concepts involved. My expertise is grounded in practical experience and a thorough knowledge of financial strategies for retirement. Let me delve into the concepts discussed in the article you provided:

Savings Plan vs. Income Plan: The article rightly emphasizes the dual nature of retirement planning—saving and creating an income plan. The savings plan involves building wealth over time, while the income plan focuses on withdrawing and distributing that wealth during retirement. Both aspects are crucial for a comprehensive retirement strategy.
Budgeting for Retirement: The importance of determining your budget for retirement is highlighted. The article suggests working backward from your lifestyle goals to calculate the amount needed each month. It introduces the 80% rule, indicating that you may need around 80% of your current income during retirement.
Secure vs. Less Secure Income: The distinction between secure and less secure income is crucial. Fixed, nondiscretionary costs (bills) should be covered by secure sources like Social Security, annuities, and bond interest. Discretionary spending, on the other hand, can be funded by less secure, portfolio-based income, including stocks, ETFs, and real estate.
Projecting Investment Growth: The article emphasizes the need for a plan for in-retirement growth to combat the impact of inflation on spending power. It suggests considering reinvestment of a portion of withdrawals to ensure portfolio growth that matches or exceeds the rate of inflation.
Planning for Taxes: Anticipating taxes on various income sources during retirement is highlighted. Many retirees overlook the tax implications of income from retirement accounts, capital gains, and Social Security benefits. The advice is to work with financial advisors or accountants to understand and plan for these tax obligations in advance.
The Role of a Financial Advisor: Throughout the article, there's a recurring recommendation to consult with a financial advisor. Whether for budgeting, projecting growth, or planning for taxes, a financial advisor is portrayed as a valuable resource to help build a robust retirement plan.

In summary, the article provides comprehensive insights into retirement planning, covering budgeting, income sources, investment growth, and tax considerations. It underscores the importance of a well-rounded approach and the guidance of a financial advisor in navigating the complexities of retirement planning.