While saving and investing for retirement is an essential component for attaining a secure financial future, it is really only one part of your overall strategy. This is because retirees require income for paying their living expenses, as well as for the “non-essentials” like fun, entertainment, and travel. One retirement income source for many is Social Security. Likewise, interest or dividends from investments may also be included, as well as annuity income.
Even though any of these retirement income sources can stand alone, it is important that you have a plan for coordinating them. That way, you could maximize – and possibly even increase – the total amount that you’ll receive.
What many people don’t realize is that the financial advisor(s) who help them to grow and protect assets prior to retirement may not be the best source for building a future income plan. This is typically better served by an individual or financial firm that specializes in converting assets into income, based on a retiree’s specific goals and needs.
How to Coordinate All of Your Retirement Income Sources
If you and/or your spouse are eligible for Social Security retirement benefits, this source of income will continue to pay out for as long as you both live – no matter how long that might be. According to the Social Security Administration, just under 40% of pre-retirement income may be replaced for an average wage earner. (This percentage is less for those who are higher income earners).
Qualified recipients can start receiving income from Social Security at age 62 – but doing so will result in a lower dollar amount of income going forward. If you wait until your full retirement age (FRA) to claim these benefits, you will receive the full amount of your Social Security income. The Social Security full retirement age ranges from 65 to 67, depending on what year you were born.
|Year of Birth||Minimum Retirement Age for Full Benefits|
|1937 or Before||65|
|1938||65 + 2 months|
|1939||65 + 4 months|
|1940||65 + 6 months|
|1941||65 + 8 months|
|1942||65 + 10 months|
|1943 to 1954||66|
|1955||66 + 2 months|
|1956||66 + 4 months|
|1957||66 + 6 months|
|1958||66 + 8 months|
|1959||66 + 10 months|
|1960 or Later||67|
Source: Social Security Administration
If you do not need your Social Security income when you reach your full retirement age, you could wait to file for these benefits – and every year that you wait (until you reach age 70) can result in an 8% increase in the dollar amount of your payment. With that in mind, it could make sense to begin accessing your other retirement income sources so that your Social Security benefits increase.
Factors to Consider When Accessing Your Income in Retirement
There are several other factors to consider in addition to the timing of your Social Security benefits. These can include the following:
Taxes – Taxes can take a substantial amount of your retirement income, in turn, reducing what you have available to spend. You may also be taxed on some of your Social Security income if you are under your full retirement age and you earn more than a stated amount of income from other sources. So, it is important to determine which income sources will be taxed and which ones won’t be.
Age (pre or post-age 59 ½) – If you access funds from qualified retirement accounts and annuities before you reach age 59 ½, you could incur an additional 10% early withdrawal penalty from the IRS.
Required Minimum Distribution (RMD) rules – Traditional IRAs and retirement plans may penalize you if you do not begin taking withdrawals at age 72. The amount of this penalty is 50% of the shortfall.
Social Security earnings limit – It is possible that your Social Security income could be reduced by the earnings limit. In this case, $1 of your benefits can be deducted for every $2 you year above a stated annual limit.
Putting the Right Income Plan in Place
Coordinating your retirement income sources can be somewhat challenging. So, it is recommended that you work with an income specialist who can guide you towards the right plan for you.
At Annuity Gator, our retirement experts can show you income strategies that are based upon your specific needs and goals, as well as your risk tolerance and intended retirement date. If you would like advice on income planning and coordination, please contact us at (888) 440-2468, or by sending an email to our secure online contact form. We look forward to assisting you.