Making Sense of Retirement Planning (5): Turning Assets into Income
Retirement planning is all about having enough to live off of after you stop earning money at your regular job. Yes, you might continue to work after you "officially" retire from your usual occupation - either full time, or part time. But it's unusual for someone to get a job that pays as much as they were earning at the end of their career.
So whether you continue to work or not, you're going to need more money when you retire from your regular full-time job. And that money will come from: Social Security, a pension (if you're one of the few these days who get a fixed, guaranteed pension) or whatever you've managed to squirrel away, either in retirement accounts or other savings and investments.
For now, let's set aside Social Security. Most of us will get something - unless we work for the Federal, State, or municipal governments, which may have their own equivalent sort of plan, or unless we never worked, or otherwise don't qualify. If you haven't already done so, go to SSA.gov, the Social Security Administration website, and set up an online account with them. You can then access your information. You'll get some idea what you'll get at different ages, depending on when you claim your benefits (e.g., age 62, age 67, age 70). When you do this, just remember they provide estimates. The final numbers may vary from those estimates.
As for a pension - technically known as a "defined benefit" pension plan - we've seen over the course of this series that most Americans no longer qualify for these. Companies just don't offer them any more. If you do get one, it gives you another potential source of guaranteed income. But since most of us don't and won't get a pension, let's turn our attention to retirement accounts as well as other personal savings and investments. Retirement accounts include 401k, 403b (if you worked for a non-profit institution) and 457 Plans (certain government and non-government employees), IRAs, Roth IRAs, and other variations of these. Other savings and investments would include bank accounts, Credit Union accounts, CDs, brokerage accounts that hold stocks, bonds and other assets.
Ideally, you've saved and invested in some or all of these vehicles. They make up all or a portion of your total assets. Now, after a lifetime of saving, it's time to take money out of them on a regular basis. You'll need to turn those assets into income. In the future, we plan to look at ways to do just that. But for now, an important note about this idea of turning assets into income: It's not as simple as throwing a switch. In fact, in various degrees, most of us will face some difficulty accomplishing this.
The root of this difficulty are psychological and emotional, especially for those of us who have sacrificed to put away something for our futures. Rather than spending our money on a bigger home, a more expense luxury car, wearing the latest greatest fashions, etc., we controlled whatever impulses we might have had in these directions and instead saved out money. As the years passed, we watched those savings grow. And unless we invested especially poorly, we likely have built up those savings to a point where we might actually have enough to assure at least a modest level of security in our later years. If you're one of these, or if you aspire to be one of these prudent citizens, congratulations! Just realize that it may not be easy to now turn around and start spending that pot of dough.
Like any other habit, you'll have some difficulty breaking that long-established pattern of saving. Indeed, the habit of prudently keeping your spending under control so you could save for the future might be considered a virtue. So don't be surprised if you feel a bit disoriented when it comes time to spend down what you've virtuously set aside.
One last word about turning assets into income: What about those who own a home? Can that be a source of income. Short answer: Yes. So for many Americans who own a home, yours may serve as a source of income at some point as well. In fact, if we consider the Department of Labor statistics here, we find that the median wealth of married couples age 65 and older breaks down into $192,000 of home equity value, and $92,000 of non-home-equity value. If you're in this category, you will most likely depend mostly on Social Security for your main source of income in retirement. However, you'd likely want to learn how to access the equity in your home, especially if you've paid off your mortgage, or if your remaining mortgage balance is low. As for that small percentage of your net worth held in other assets, you may still be interested in how to turn these into income, although your choices will be fewer than if you had more of these other assets.
And with that last word, a word of warning: Be careful how you spend down your assets. Financial institutions would love to get their hands on your savings and investments. And while some may offer products that could enhance your retirement years, you would be wise to first formulate a plan - a retirement plan - that takes into consideration your goals for the future, inventories all you own, and carefully documents all your expenses now and those you might expect in the future as you get older.
In short, planning must be the first step you take before you start drawing down on those assets. And that planning should include a careful consideration of when you (and your spouse) should file for social security. Indeed, for most of us, the age at which we begin receiving social security will determine the relative success of your retirement plan.
We've already offered some initial ideas to get the ball rolling with your retirement plan in our previous four (4) installments of "Making Sense of Retirement Planning." Now may be a good time to review these.
So whether you continue to work or not, you're going to need more money when you retire from your regular full-time job. And that money will come from: Social Security, a pension (if you're one of the few these days who get a fixed, guaranteed pension) or whatever you've managed to squirrel away, either in retirement accounts or other savings and investments.
For now, let's set aside Social Security. Most of us will get something - unless we work for the Federal, State, or municipal governments, which may have their own equivalent sort of plan, or unless we never worked, or otherwise don't qualify. If you haven't already done so, go to SSA.gov, the Social Security Administration website, and set up an online account with them. You can then access your information. You'll get some idea what you'll get at different ages, depending on when you claim your benefits (e.g., age 62, age 67, age 70). When you do this, just remember they provide estimates. The final numbers may vary from those estimates.
As for a pension - technically known as a "defined benefit" pension plan - we've seen over the course of this series that most Americans no longer qualify for these. Companies just don't offer them any more. If you do get one, it gives you another potential source of guaranteed income. But since most of us don't and won't get a pension, let's turn our attention to retirement accounts as well as other personal savings and investments. Retirement accounts include 401k, 403b (if you worked for a non-profit institution) and 457 Plans (certain government and non-government employees), IRAs, Roth IRAs, and other variations of these. Other savings and investments would include bank accounts, Credit Union accounts, CDs, brokerage accounts that hold stocks, bonds and other assets.
Ideally, you've saved and invested in some or all of these vehicles. They make up all or a portion of your total assets. Now, after a lifetime of saving, it's time to take money out of them on a regular basis. You'll need to turn those assets into income. In the future, we plan to look at ways to do just that. But for now, an important note about this idea of turning assets into income: It's not as simple as throwing a switch. In fact, in various degrees, most of us will face some difficulty accomplishing this.
The root of this difficulty are psychological and emotional, especially for those of us who have sacrificed to put away something for our futures. Rather than spending our money on a bigger home, a more expense luxury car, wearing the latest greatest fashions, etc., we controlled whatever impulses we might have had in these directions and instead saved out money. As the years passed, we watched those savings grow. And unless we invested especially poorly, we likely have built up those savings to a point where we might actually have enough to assure at least a modest level of security in our later years. If you're one of these, or if you aspire to be one of these prudent citizens, congratulations! Just realize that it may not be easy to now turn around and start spending that pot of dough.
Like any other habit, you'll have some difficulty breaking that long-established pattern of saving. Indeed, the habit of prudently keeping your spending under control so you could save for the future might be considered a virtue. So don't be surprised if you feel a bit disoriented when it comes time to spend down what you've virtuously set aside.
One last word about turning assets into income: What about those who own a home? Can that be a source of income. Short answer: Yes. So for many Americans who own a home, yours may serve as a source of income at some point as well. In fact, if we consider the Department of Labor statistics here, we find that the median wealth of married couples age 65 and older breaks down into $192,000 of home equity value, and $92,000 of non-home-equity value. If you're in this category, you will most likely depend mostly on Social Security for your main source of income in retirement. However, you'd likely want to learn how to access the equity in your home, especially if you've paid off your mortgage, or if your remaining mortgage balance is low. As for that small percentage of your net worth held in other assets, you may still be interested in how to turn these into income, although your choices will be fewer than if you had more of these other assets.
And with that last word, a word of warning: Be careful how you spend down your assets. Financial institutions would love to get their hands on your savings and investments. And while some may offer products that could enhance your retirement years, you would be wise to first formulate a plan - a retirement plan - that takes into consideration your goals for the future, inventories all you own, and carefully documents all your expenses now and those you might expect in the future as you get older.
In short, planning must be the first step you take before you start drawing down on those assets. And that planning should include a careful consideration of when you (and your spouse) should file for social security. Indeed, for most of us, the age at which we begin receiving social security will determine the relative success of your retirement plan.
We've already offered some initial ideas to get the ball rolling with your retirement plan in our previous four (4) installments of "Making Sense of Retirement Planning." Now may be a good time to review these.
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