5 Critical Steps for Creating a Retirement Income Plan - Trust Point

5 Critical Steps for Creating a Retirement Income Plan

Two elderly individuals looking at a computer making a retirement income plan

We’ve said it before, and we’ll say it again: It’s never too early to start planning for retirement.

Taking the first step and deciding to make a retirement income plan is more than half the battle. Once you’re ready to get started (or if you want to revisit your existing plan), it can actually be a streamlined, stress-free process when you take the right approach.

While everyone’s situation will be unique to them based on their financial situation, everyone should take the following five steps when creating a retirement income plan. Let’s dive in.

1. Evaluate Your Current Financial Situation

First, you’ll need to know your income sources. Social Security benefits are estimated based on your work history and retirement age. If you have a pension from your employer (usually from government or union jobs), it will have specific terms and payout options available to you. Your investment portfolio and any purchased annuities would also be considered income streams.

You’ll also need to identify your expenses for basic living needs (i.e., housing, food, utilities), discretionary spend (i.e., your desired lifestyle with hobbies, travel, entertainment), and healthcare costs. Preparing for potential short-term medical expenses, long-term care needs, and healthcare premiums is essential as you age.

Keep in mind your expected monthly retirement expenses are typically 75% of your pre-retirement expenses.

2. Set Realistic Goals

Next, define your retirement goals. Where do you want to live? What activities will you participate in? Do you plan to travel? Do you want to set money aside for your family? Leave no stone unturned when defining your retirement goals (and make sure they’re realistic), as this will help you estimate the income you’ll need and guide your investment and withdrawal strategies.

3. Diversify Your Income Sources

If you haven’t already, add diversification to your income streams, considering Social Security benefits, pension payments, annuities, dividends from investments, and withdrawals from retirement accounts like 401(k)s and IRAs.

What type of investments does your portfolio include (i.e., stocks, bonds, cash)? How will you spread your investments across different asset classes? What’s your approach to risk management over time? Ask and answer important income source questions, and remember that a combination can help you manage risk and potentially increase your overall income stability.

4. Define a Withdrawal Strategy

You’ll need to set a sustainable withdrawal rate from your portfolio that balances your income needs with the longevity of your savings. Typically, retirees will pull income from taxable accounts, then tax-deferred accounts (i.e., traditional IRAs, 401(k)s, and then tax-free accounts like Roth IRAs. But again, it’s important to regularly review and adjust your withdrawal strategy based on market performance, inflation, and any unexpected changes to your financial situation.

5. Avoid Common Mistakes

First, we know that understanding, managing, and tracking all the components of a retirement income plan can feel overwhelming. The stress of retirement planning can cause people to overestimate or underestimate important metrics or even forget to account for critical elements that impact strategy, leading to mistakes that (literally) cost them down the road.

Knowing what those mistakes are helps you avoid them and sets you up for a stress-free retirement planning process. Be careful not to:

  • Underestimate Expenses: Remember to be thorough about your budget (hobbies, travel, emergency funds), as failing to accurately estimate your future expenses can easily lead to financial stress in retirement.
  • Count on One Income Source: Relying too heavily on one income source is risky; it’s best to diversify your income sources to create a safety net in case one source underperforms.
  • Create an Inflexible Plan: A static retirement income plan doesn’t account for changing market conditions, life events, or evolving goals. Regularly review and adjust your strategy to account for investment fluctuations or unexpected expenses.
  • Overlook Inflation: After years of market volatility, inflation should be top of mind for everyone. Be sure to include inflation-adjusted withdrawals in your retirement income plan to ensure your income keeps up with rising costs.
  • Ignore Longevity Risk: People live longer worldwide, and the U.S. population is growing older, with more and more people living to 100. This means your retirement savings need to stretch further (this is where annuities come into play). Be sure to consider various life expectancy scenarios and include a buffer in your income plan.

Other mistakes come from neglecting or overlooking various tax implications, overestimating investment returns, disregarding future healthcare costs, taking on too much investment risk, and starting Social Security too early or too late.

Seek Expert Guidance

Remember, you don’t need to figure out your retirement plan by yourself. We highly recommend consulting with experienced financial experts who can guide and help you make informed decisions tailored to your unique situation. Having a professional on your side can truly make retirement planning stress free.

Trust Point is here to help you get started on your retirement income plan or answer any questions about your current plan. Our team is ready to connect when you are!



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