Managing your income in retirement

Create a list of all your assets and liabilities. Which assets can be used to fund your retirement and which ones should not (such as your primary home)? This will help you identify those assets that can be used to fund your retirement needs, likely including:

• Taxable investment accounts
• Employer-sponsored qualified retirement plans, such as 401(k), 403(b), and 457 plans
• Traditional and Roth IRAs
• Pension plans (defined benefit plans) and Annuities
• Social Security
• And other assets such as deferred compensation, stock options, real estate, business assets, etc.

Then create a list of your retirement income sources and estimated payment amounts. This will give you an idea how much income you expect to receive and when.

Next, let’s look at how much you need to cover your retirement expenses. Let’s start by estimating your annual expenses broken apart into two important categories:

• Essential expenses are ones that would be difficult to reduce, eliminate, or put off, like food, mortgage or rent payments, transportation, utilities, income taxes, insurance, and health care expenses.
• Discretionary expenses include entertainment, travel, recreation, charitable donations, gifts for family & friends, and luxury purchases. You can potentially lower, eliminate, or postpone these expenses when necessary.

Our retirement expense planning worksheet (PDF) can help. When you’re finished, you should have a good idea of how much you’ll need and where you can limit some of your discretionary spending, if needed.

For many people their income does not cover all their spending needs, and as such they look to other assets to fund the shortfall. These are important decisions as the additional funds may impact their other retirement benefits. For example, increases in taxable income may cause your Social Security benefits to be taxed, your Medicare premiums to increase, as well as move you into higher income tax brackets. The effect can be multiplied if you are married. However delaying receipt of too much income during retirement may cause significant tax issues later in your life.

Cash-flow planning around income taxation recognition as well as your other retirement benefits is one of the most important decisions you can make in retirement.

How many years will you need to fund your retirement? While none of us can predict how long we’ll live, it’s helpful to know that, on average, an American at age 65 will spend approximately 20 years in retirement.* In fact, some will spend more time in retirement than they spent working.

Consider your family history and personal health. What age did your parents and grandparents live to? If you think you’ll live to a ripe old age, you’ll need to employ strategies to help ensure your assets last as long as you do.

If you are married, make sure to consider your spouse’s life expectancy as well. It is likely that your ‘bucket’ of assets will need to support both you and your spouse’s lifetime needs.

Even relatively low inflation may erode your purchasing power over time. The longer you spend in retirement, the greater its potential effect. With many retirees looking at 20 or more years in retirement, the impact to your lifestyle can be significant.

One of the biggest mistakes retirees can make is putting too much of their monies in conservative assets (such as CDs, bonds, or even cash). Although these safer investments may feel comfortable during retirement, they generally do not keep pace with inflation.

Most investors find that by employing a mix of fixed income and stocks they are better able to keep pace with inflation, while still considering their own risk preferences.

Carefully consider when you (and your spouse) should start taking Social Security. Although you can begin Social Security as early as age 62, many retirees start at their Full Retirement Age (which is age 66 for those born from 1943-1954; and gradually increases to age 67 for those born between 1955-1960). If you choose to delay receipt of Social Security further, the benefit continues to increase until age 70.

One common strategy for a married couple, where each spouse has earned benefits, is for the spouse with the highest benefit amount to delay receipt until age 70 to maximize monthly payments, while their spouse may claim earlier. This strategy is not best for everyone and there are a number of important factors to consider before you decide when to claim benefits, such as your marital status, age, life expectancy, and other assets available.

If you have time before making this decision, be flexible. Changes to Social Security (& Medicare) policies may need to be addressed by Congress in the coming years to address potential funding shortfalls. Continue to evaluate the best option for your situation each year, to see if any changes to your initial plan are warranted.

Employing a flexible withdrawal strategy is one way to help ensure your investments last as long as you do. This involves reducing your discretionary spending when there’s market volatility and, as a result, withdrawing less from your portfolio during these periods. Using this strategy should leave more in your portfolio for use down the road. To enhance a flexible withdrawal strategy, it’s a good idea to have a cash reserve available to tap into when there’s market volatility.

Most assets saved for retirement needs are held in qualified employer sponsored retirement plans, such as 401(k), 403(b), and 457(b) plans (as well as IRAs). The majority of these assets are pre-tax and on distribution are subject to tax on both what you saved and its’ growth over the years.

Required Minimum Distributions (RMDs) are the mandatory amount that retirees must take annually from their retirement accounts as they age. The age to begin RMDs has been steadily increasing. In 2023, the SECURE 2.0 Act increased the RMD age to 73 and then again to age 75 in 2033.

Although these changes may be beneficial for some, delaying receipt of most pre-tax dollars into later retirement may come at a cost. With this later date, retirees are then forced to take distributions over a shortened life expectancy thus increasing their taxable impact. Additionally, if a spouse passed away during this time, distributions could be subject to single taxpayer brackets as well.

Taking advantage of your low-income tax bracket years, without impacting your other retirement benefits, can be beneficial strategy.

Working with a knowledgeable professional can help you effectively manage your retirement cash-flow needs, keep abreast of key legislative changes impacting your plan, and may help you maximize the monies in your own pocket.

*Social Security Administration, ssa.gov

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether you realize any planned tax result depends on the specific facts of your own situation at the time your tax return is filed.

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