For decades, you’ve stashed away part of your hard-earned paycheck so you could have a good retirement. All those years of denying your urge to spend have paid off. Now, it’s time to cash in - one strategically planned withdrawal at a time.
Once you’ve retired and the paychecks have stopped, your financial focus should shift from building that nest egg to creating monthly income from your savings. The challenge is to manage your money so you have enough to last throughout retirement. You’ll need to watch out for a few things:
- Market downturns - You’ve probably shifted a portion of your investments away from stocks to help lower market risk. But the value of your investments could still decrease if the markets perform poorly; that can affect your retirement income.
- Inflation - Budgeting is crucial for most retirees. As you estimate monthly expenses for the long run, take into account rising costs for food, fuel, health care and other necessities.
- Taxes - If your income is about the same as it was before retirement, your taxes may be too.
- Medical expenses - Depending on your insurance, treating an illness could affect your long-term income potential. Medicare doesn’t kick in until age 65, so there may be a period of time when you’ll need individual insurance coverage (available through the private insurance market).
- Extended family needs - If you’re part of the “sandwich” generation, you may need to take care of aging parents, your children and yourselves. Keeping your finances in order could make it easier to help others.
- Longevity - Life expectancies are increasing in the U.S. Make sure your income strategy accounts for the fact that you could live another 20 or 30 years.
Voila — Your savings just became income
As employer pensions become less common, most of us will rely on Social Security and personal savings to help fund retirement. Start by determining your annual withdrawal rate. This is the amount of money you’ll take each year from your portfolio, including returns and principal. You’ll also need to decide which assets to draw down first. Keep in mind that with tax-deferred retirement accounts, required minimum distributions kick in once you’re 70½. Failing to take one could result in tax penalties.
Give it away
If you’re thinking about giving to charity, gifts of up to 50% of your annual income are tax deductible. Amounts over that can be prorated for five years. Certain gifts to individuals can provide tax breaks. In 2014, a person could gift up to $14,000 per person, per year without creating a taxable event – the amount is not considered income, so neither the recipient nor the donor are taxed on the gift. It works on an individual level, too. For example, Mr. and Mrs. Smith can each give that amount to their son Jack and to his wife, effectively giving the couple up to $56,000 a year, tax free (at the 2014 rate).
Know your options
You may want to consider an annuity. Its main purpose is to generate a steady and reliable source of payments for up to a lifetime. You can also look at bonds, certificates of deposit, and stocks that pay regular dividends. A financial advisor can help determine which ones make the most sense for you.
With your finances sorted out, you can fully enjoy your new lifestyle. So kick back and catch up on all the movies you wanted to see and the books you never had time to read. And should you want to talk with a Voya financial professional about your finances, we’ll be close at hand.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.
The information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor
Securities offered through Voya Financial Advisors, Inc. member SIPC.
Neither Voya nor its affiliated companies provide tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.