Time for a Retirement Income Assessment?

August 21, 2019
By Angela Baker, JD, CFP®, CLTC, CASL®

Have you ever wondered how you will be able to afford life in retirement? Did you ever stop to consider when might be a good time to think through these details? It might be earlier than you’re thinking.

Evaluating retirement readiness requires evaluating a number of different criteria and asking yourself a number of different questions. From the perspective of being able to make a difference in outcomes, we believe that it is important to assess your expected retirement income at least 10 years from when you expect to stop working.

We believe a basic retirement income assessment should, at a minimum, answer these questions:

  • Will this income meet your needs?
  • Will this income last your lifetime?
  • Are there risks to the security of this income?
  • Will you have to pay taxes on this income?
  • Will this income increase with inflation?

You may have given some thought to these questions. But, it is important to actually gather the information and do the math.

Properly assessing expected income needs can ease concerns now and mitigate any cash flow issues in retirement. To start a retirement income assessment, begin by listing all possible sources of income. These can include:

  • Social security income
  • Pension or annuity income
  • Distributions from retirement accounts
  • Distributions from taxable accounts invested for total return (dividends, income and growth)
  • Savings accounts and CDs
  • Access to home equity
  • Part-time work
  • Rental properties or royalty income

After listing your expected income, it is important to consider that some sources, such as social security, will provide lifetime income and others, such as savings accounts, can be depleted. Note that income from investment and brokerage accounts or variable annuities, are exposed to market risks. It is important to understand the types of risk associated with each income source.

Also, consider how income sources are taxed and the net implications. Distributions from a Roth IRA are, in most instances, tax free, but the distributions from a traditional IRA are taxed as ordinary income. As for inflation, while most federal and state pensions are indexed for inflation, most private pensions are not.

As you are tallying up your anticipated retirement income, consider the other side of the coin, and start estimating your retirement expenses. When pre-retirees were asked their biggest retirement concerns, at the top of the list was not having enough income to pay for health care, having too much debt, becoming a victim of fraud, not having enough income to cover expenses, and running out of money. Properly addressing the expense side of retirement income assessment is often the single most important factor in a positive long term projection.

Because the greatest risk to your financial security in retirement comes from not properly managing expenses, my next article will focus on creating a retirement budget.

Please reach out to your West Financial Services relationship manager, or a member of the financial planning team, if you would like to discuss this further.

Meet Angela Baker, JD, CFP®, CLTC, CASL®.

Referrals of family, friends and colleagues who may benefit from financial planning and investment management guidance are always welcome. Thank you for recommending our firm.

To view other articles in the November 2019 Financial Planning Focus newsletter, click here.

Important Disclosures

West Financial Services, Inc. is an SEC registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.

Information contained herein was derived from third party sources including, but not limited to, Bloomberg, Standard & Poor’s, Dow Jones & Company, the Federal Reserve Bank of New York, and Morningstar, Inc. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Please contact us if you would like to obtain a copy of the third party sources.