By Wade Brittingham
Egan, Berger & Weiner, LLC
Whether you’re watching the nightly news or browsing online, it’s hard to escape hearing about baby boomers and America’s shifting demographics.
The nation’s aging population — specifically people ages 65 and older — will grow to 81 million by 2050, up from 37 million in 2005. As this wave of Americans begins the transition into retirement, now is a great time to revisit the basics of retirement income.
Switching from being an employee with a regular paycheck to living on a fixed income can seem intimidating and a little scary. In addition, people’s perceptions of where retirement income comes from (see “Perception” chart below) don’t always match reality (see “Reality” chart further below) when people finally retire.
We often hear questions about retirement income and spending during the initial years of retirement. How much can I spend? When do I take Social Security benefits? Where will my pay come from during retirement?
Many retirees will be living on a combination of investment income from their portfolio and Social Security benefits. The lucky ones will have three primary sources of income: a pension, Social Security, and investment income. It’s important to identify your primary sources of retirement income and understand the details of each one.
Possible Sources of Retirement Income
- Personal Savings and Investment Income: Your investment portfolio consists of your retirement accounts (IRAs, 401k, etc.), personal savings, and your brokerage accounts (taxable accounts). How much can you spend? Historically, a sustainable withdrawal rate on investment portfolios has been 3 percent to 6 percent per year; however, many individual factors can affect your optimum withdrawal rate — such as your age, amount of time in retirement, and asset allocation. As long as you don’t take out too much each year, your portfolio can continue to grow while providing you additional income each year. Of course, if you choose a higher withdrawal rate, then you increase the likelihood you will spend down your principal too quickly.
- Social Security: This is a primary source of retirement income, so you must have a strategy for maximizing Social Security benefits. Social Security benefits represent 70 percent of annual income for the average retiree (see chart). After all, Social Security is a government-guaranteed, inflation-adjusted, lifetime annuity. Most people rush to take benefits early because they want their money, but a rushed decision could have a lasting impact on you or your spouse. Do you know your options when you file for benefits?
- Pensions: Also called Defined Benefit plans, pensions are common for federal employees, local and state government employees, and members of the US military. If you’re lucky enough to have a pension, make sure to request a pension illustration or an outline of your pension benefit options. Most pension plans will give you multiple benefit options, including payouts with a survivor benefit, without survivor benefits, and lump-sum payments. These options can be confusing and leave you scratching your head. You only get one chance to elect your option and the outcome is final, so make sure to review all of your options. You may want to discuss the pros and cons of each pension benefit option with a professional financial adviser.
The Bottom Line
Retirement is typically the most important goal of your financial plan. If you don’t have a retirement plan or just want to review your existing plan, please call our office and schedule a meeting. Send me an email at Wbrittingham@ebwllc.com.
- Fast Facts & Figures About Social Security, 2014, Social Security Administration
- US Population Projections: 2005-2050, Pew Research Center, by Jeffrey S. Passel and D’Vera Cohn
About Wade Brittingham
- Graduate of the University of Kentucky with a Bachelor of Arts in international economics and foreign languages
- Graduate of Georgetown University’s Financial Planning Program (2008)
- Previous financial services experience with Fidelity Investments and several independent financial planning firms
- Volunteer instructor for US Air Force’s Transition Assistance Program inside the Pentagon for three years, helping US military with financial planning
- Member of the Financial Planning Association (FPA)
Originally from Lexington, KY, Brittingham has been living and working in the Washington, DC, area for more than 10 years. He is passionate about investment education and international travel. His recent travels include trips to Eastern Europe and Ethiopia. He also enjoys enjoys golf, running, and watching college basketball.
Learn more about Egan, Berger & Weiner, LLC at EBWFinancialNews.com.