Income planning is one of the most important things you can do for your retirement. Planning not only gives you peace of mind, but it lets you see exactly how much you have and how to plan your finances accordingly.
Understanding your income options and what you’ll need in terms of day-to-day living is a good place to start. However, there are many more things to consider when building an income plan for retirement.
We want to help make sure that you create an income plan that you’re happy with to retire with peace of mind and confidence. So, here’s our guide on how to build an income plan for retirement:
Break your income plan into three categories
Income planning is a crucial element when it comes to retirement planning. When we help our clients build an income plan for retirement, we break their income down into three different categories:
1. Essential needs – this covers everything from your bills to rent or mortgage payments, food, living costs, and so on.
2. Wants – these are things that you want, but don’t necessarily need to survive, such as a nice summer vacation or a new car.
3. Legacy – the legacy income is basically what you want to leave to your children or charity, etc.
Create a written retirement income plan
Everyone needs a written retirement income plan. You need to know your expenses so that you can work out how much money you have and how much you will spend in retirement. With this information, building a retirement income plan becomes much more manageable. However, it’s not always easy to figure these things out.
You might not know how much you’re spending or how much you will need to spend in retirement. You may count a mortgage that will be paid off before retirement, therefore creating an inaccurate representation of how much you will have to spend.
When creating a retirement income plan, we build the expenses into it and assume some inflation. Our goal is to clarify what costs will be present throughout retirement and which fees will expire. This information is essential because inflation can impact those dollars, and we do not want to inflate things that will not be present.
Understand what is for retirement and what isn’t
Planning your income plan for retirement means understanding what is for retirement and what is not for retirement.
Sometimes we sit down with a client, and they’ll give us a number such as $10,000. Perhaps they are accustomed to making $10,000 a month. However, they fail to consider whether that amount is before or after they have paid taxes. They look at the $10k as a gross number when we need to know the net number of what they spend.
Taxes and retirement are different than when you’re actively working. So, we ask our clients for their “bring home” amount, which is how much money they bring home after they’ve paid taxes and put money in their 401(k), etc. Although they make $10,000 a month, they might only take home $5,000 a month. Once we have that figure, we discuss how much they save per month and then calculate how much they’re spending.
While building your retirement income plan, make sure you work out how much you actually bring home. That figure is your actual income need.
What to do if you think you’re short
If you think you are short, you may discover that you need to work a little longer than you initially thought. However, if you don’t want to delay retirement, you need to reconsider your budget. If you’re going to retire at age 60, you need to adjust your budget accordingly. You can only work with what you have saved. So, write down your expenses, understand what is possible, and then seek help in putting the right steps in place.
Many people assume they are short because they are unsure how much money their savings in their 401(k) or IRA (Individual retirement account) can generate. However, there are often additional options to help you get more income from your IRA or 401(k) than you realize.
Often, thinking you’re short isn’t because you’re short. It’s simply because you lack understanding of the numbers. So, we highly recommend that you take time to really understand your numbers so that you don’t jump to conclusions and assume you’re short when you’re not.
How to start the planning process
An excellent place to start planning your retirement income is with your basic numbers. Figure out what your essential needs are and how much they will cost you per month. You will also need to clarify your house payments if there are any. When calculating how much you spend on food each month, we encourage you to break it down into two categories:
- How much you spend at the grocery store
- How much you spend eating out
Your essential needs should also include car insurance, utility bills, and things you cannot live without.
A monthly budget plan is a great way to help track your income. You can create one on paper or with a spreadsheet on your computer. If you’re a tech whizz, you might enjoy using a software, called an aggregation software, such as Mint.
Mint is a free online budget tracker and planner that makes creating a monthly budget plan very easy. It helps you to keep on top of your money and manage finances in one place.
If you want help creating your retirement income plan, we can help! You can book a complimentary 15-minute call where we can give you some guidance and help you break this process down.