Create an income plan for the life you want in retirement.
Whatever you envision for your future—adventure, relaxation, volunteering or even part-time work—making it happen takes preparation. If you’re close to retirement (less than 10 years), it’s time to start planning for income and the transition to life after work.
Planning for Income When You're Close to Retirement
Living in retirement will be very different from working toward it. You’ll need a plan to cover expenses and to help answer the question of how long your money will last in retirement. Watch our Retirement Income video series and read on for more income planning strategies.
1. Picture It: Know What You Want
Visualize what you want retirement to look like, and then prioritize your life goals. Many people skip this step, but it’s important when you’re planning out how you’ll pay for your future lifestyle. Ask yourself:
When do I want to retire?
Where will I live?
Will I travel?
What kind of legacy do I want to leave?
2. Pay For It: Create Your Budget
Use your current expenses and investments (as expected income) as a starting point to map out a realistic retirement budget.
Calculate Your Retirement Fitness Ratio
Source: American Century Investments, 2021.
3. Plan It: Know the Risks and Select an Income Strategy
It’s time to prepare for the transition from a steady paycheck to retirement income.
New Risks in Retirement
Plan now for key risks your money could face in retirement:
Longevity risk. Consider the likelihood that you could outlive your money.
Inflation risk. Rising prices will impact your long-term purchasing power.
Market risk. Consider the effects of volatility and market declines, especially early in retirement.
Overspending risk. Withdrawing too much, too early will affect your long-term plan.
Health care risk. Health care costs could overtake your budget.
A retirement income strategy can help you decide how to divvy up your savings and convert it into a steady income.
Three popular portfolio strategies are Total Return, Buckets/Time Segmentation and Income Floor.
Create a broadly diversified portfolio that aligns with your risk tolerance.
BUCKET / TIME SEGMENTATION
Divide your portfolio into 2 to 6 buckets, each with its own allocation / income goal.
Part of your portfolio is dedicated to essential expenses (your income floor), while the rest aims to grow your savings.
4. Position It: Build Your Retirement Portfolio
Your retirement portfolio is just as important as your pre-retirement portfolio. The goal is to create a portfolio that gives you the best chance of success while minimizing risk.
Consider these key principles when choosing investments:
Match spending to risk. Consider using lower-risk investments for essentials and stocks/higher-risk investments for discretionary spending or to address longevity and inflation risk.
Avoid chasing performance. Sticking with your diversified portfolio can help you maintain an appropriate risk level and avoid the temptation of high-flying (and risky) investments.
Diversification may help lower risk if volatility occurs right before or after you retire.
Source: American Century Investments. For illustrative purposes only.
More Components for Your Retirement Plan
Your savings and investments are important pieces for your future income, but incorporating other sources of income can help you better prepare for retirement.
Before you draw, consider strategies to get the most from your benefits.
Knowing your options can help you plan for health care expenses.
Working in Retirement
Learn what to consider if you plan to work in retirement.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Diversification does not assure a profit nor does it protect against loss of principal.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.