Retirement can be difficult because it requires a mental shift and a complete adjustment in the way you have been doing things for the past six or seven decades. You are used to earning an income and building your wealth. Now, in retirement, you have to turn around and start to spend everything you have been saving for so long. It can be a challenging adjustment for physicians, and it can be hard to know how to meet your income needs once you are retired. Answering the following questions will tell you the 5 things you must know to plan for your retirement income needs.
1. What Is Your Real Need?
This question seems so simple, yet it is often overlooked. Do you even know how much income you will need in retirement? Last month, we talked about the importance of having a clear picture of what you want in retirement and tracking your spending so that you know how much retirement will cost.
Before you can develop a plan for your retirement income needs, you need to have a goal and settle on the destination to which your plan will lead you. If you aren’t sure how much income you will need in retirement, I encourage you to go back and read last month’s article to help you get a clearer picture of your real needs.
2. What Income Sources Do You Have?
Once you know your goal, you need to take stock of the tools available to get you there. What income sources do you have? This could be anything from Social Security and pensions to annuities, rental income, or taxable brokerage accounts. It is important to analyze your alternative income strategies and review the cost benefits of each choice of potential income elections.
3. What Are The Tax Implications?
Having clarified the different income sources available to you, it is important to understand the tax implications of each one. You may have some accounts that are pre-tax and others that are post-tax, and then there is Social Security, which is taxed based on how much total taxable income you have. It is critical to review the tax status of your accumulated assets in order to develop a tax-efficient income strategy.
4. How Should The Money Flow?
Your cash flow is simply the flow of money into and out of your hands. A cash flow plan, commonly called a budget, is simply a written document showing where your money is coming from and where it is going to go.
While you are working, cash flow planning is simplified in that you usually only have one or two sources of income that are fairly fixed. All of your planning goes into the outflow, not the inflow, of resources. In retirement, it gets more complicated. You now have multiple streams of income and can sometimes turn them on or off at will. You need to do a more in-depth cash flow planning analysis to determine the best route for your assets to reach income.
5. What Is Holding It All Together?
You’ve worked hard for decades and been diligent with your finances to get you where you are today. Now that it is time to start drawing from your hard-earned resources, you need to have a plan in place to protect them in the coming years. Having a disciplined process can help reduce the impact of short-term market volatility on your income and preserve your wealth for the rest of your life and the generations to come.
It’s hard to figure out how much income you need and the best way to go about drawing it in retirement. Many people in your situation find that it’s helpful to work with a financial professional who can help you develop a tax-efficient plan for your income needs in retirement. If you would like to sit down with one of our independent, fee-only advisors at Harvest Asset Group to see how we might be able to help you plan for your retirement, call us at (207) 775-1151 or email firstname.lastname@example.org. We’re here to help.
Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.