If you’re in your mid-50s, you’re part of the first wave of Generation Xers to start planning for retirement. While it may not be the first time you’ve considered how you’ll support your lifestyle once you stop working, now is a good time to develop a solid retirement income strategy.
According to the Transamerica Center for Retirement Studies, 80 percent of Gen Xers are saving for retirement. However, the average amount saved by those born between the mid-1960s and late-1970s is only $72,000, which won’t go far in retirement. If you plan to continue working beyond 67—the age when Gen Xers qualify for full Social Security—this might not bother you. But if you plan to retire at 67 and want to have reliable income when you do, you need to prepare—and that starts with a retirement plan.
Step 1: Define Your Goals
Retirement strategies have traditionally been described as a three-legged stool, with pensions, Social Security, and personal savings working together to support you financially during retirement.
But more and more often, these three legs aren’t covering as much as they once did. Unlike decades ago, few companies today provide full pensions for their employees, Social Security is at risk of future cuts, medical expenses are rising, and the amount people put into personal savings is down.
As a result, you may want to consider other ways to make sure you have enough income during your retirement.
The first step to developing a plan for retirement is defining your goals. Some questions to ask yourself (and your spouse) include:
- How long do I think I’ll live?
- When do I want to retire?
- How much money do I need to maintain my lifestyle?
- What expenses do I foresee in retirement, both continuing and new?
- How much do I make now?
The answers to these questions can help you identify your income needs in retirement and how much you may need to set aside to reach your goals.
Whatever goals you set for yourself, know that there’s no one retirement income strategy that works for everyone. And, as with an any long-term savings plan, your retirement strategy should probably include more than one savings vehicle.
Whatever goals you set for yourself, know that there’s no one retirement income strategy that works for everyone.
Step 2: Diversify Your Retirement Strategy
As you select income solutions for retirement, remember one key thing: don’t rely on just one product. Talk with a financial professional to learn about your options and help you decide which ones are appropriate for you. Different elements of your strategy might include 401(k)s, IRAs, and additional income sources like fixed annuities or life insurance.
401(k)s and IRAs can come in the form of traditional or Roth. Contributions to traditional 401(k)s and IRAs are not taxed as they go in, but once you enter retirement and begin taking withdrawals, those withdrawals are taxed. Conversely, if you select a Roth 401(k) or Roth IRA as part of your strategy, your contributions are taxed before you make them, but the withdrawals you make in retirement are tax-free after you reach age 59 ½ and the account has been open for at least five years.
While a 401(k) or IRA of either type can provide retirement income, they do so with some level of limitations. 401(k)s are dependent on your employer, and many have contribution limits that cap the amount you can put into them. With these limits, there’s a chance you could outlive the money they provide. IRAs present the same restrictions.
Step 3: Assure Your Income in Retirement
Unlike 401(k)s and IRAs, fixed annuities can provide a source of income you can’t outlive. Fixed annuities are contracts between you and an insurance company, in which you make a premium payment, or several payments, and the company guarantees a steady flow of income during your retirement. The payments you make are tax-deferred, allowing your money to compound faster. When you decide you want to take your annuity savings as income, you can specify whether you want payments for a set period of time, for the rest of your life, or even for the life of your spouse.
Fixed annuities come in various shapes and sizes—and can often be modified depending on your personal financial situation. These modifications can include riders to help cover terminal illnesses and nursing home care, and wealth transfer opportunities to loved ones when you die.
Start Planning Today
For Gen Xers who grew up with the advent of computers, the internet, and electric cars, it’s easier than ever to plan for retirement. Why wait? You can start developing a solid retirement income strategy today. Talk with a financial professional to start making a strategy and discover the options that can help you meet your goals.
Insurance and annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company. Insurance and annuity products offer optional benefits and riders which may involve additional cost. Annuity withdrawals are subject to ordinary income taxes, and if taken prior to age 59 ½ may be subject to an additional 10 percent federal penalty.
Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or guarantee against losses.