Performing periodic reviews of retirement income plans and budgeting strategies is beneficial for most retirees and savers nearing retirement.
Whether you’re preparing to retire or are already living on your retirement savings, the start of a new year may provide an ideal opportunity to assess your financial plan and make adjustments based on unexpected expenses or changes in your lifestyle over the previous year.
The Benefits of a Retirement Income Review
It’s no secret that retirement comes with unique financial challenges, particularly the limitations of living on a fixed income and rising healthcare costs. Once you reach the point in life where you’re withdrawing from your assets rather than growing them, it becomes especially important to adopt conservative practices that enhance sustainability and minimize risk. A review of your retirement income may help you:
- Ensure your income streams are sustainable: Add up your Social Security benefits and additional income sources, such as a pension or rental property income. Do these income sources still support your lifestyle? Will they continue to support your current spending levels over the coming year?
Account for inflation and rising costs: Accurately gauging your current income levels is vital, but it only answers part of the equation. It’s equally important to understand how your purchasing power has changed year over year. When reviewing your plan, make sure you’re adjusting your income target based on changing costs. - Prepare for unexpected expenses: Retirees, even those who are still healthy and active, are always at risk of incurring unexpected expenses. Surprise medical bills are one of the more obvious risks, but you may also need to cover emergency home repairs, travel expenses, or other unforeseeable costs that could deplete your savings over the course of the coming year.
Steps for Evaluating Your Current Retirement Income Plan
- Evaluate your income sources: The first step in any retirement income review should be identifying all your current income streams, including Social Security, annuities, and withdrawals from your retirement savings accounts.
- Calculate expenses over the coming year: The next step should be calculating the fixed and variable expenses you can predict for the upcoming year. Determine whether your current income sources fully cover those future expenses, as well as your estimated shortfall or surplus.
- Reassess your spending habits: Many retirees reach a point where they need to reassess their spending and adjust their lifestyle for continued sustainability. Consider reallocating funds to prioritize essential expenses, such as healthcare or housing.
- Account for market performance: If you don’t regularly monitor your portfolio’s performance, now may be the ideal time to examine your investments. Use this opportunity to rebalance your investments as needed to match your risk tolerance with your current and future income needs. It may be helpful to work with a financial advisor to ensure your withdrawals won’t outpace your portfolio’s growth.
- Plan for longevity: A more conservative approach may be preferable for retirees planning for longevity.
- Revisit tax strategies: The start of a new year, when you still have a few months before the tax-filing deadline, might be the ideal time to examine the efficiency of your current withdrawal strategy. Consider discussing potential modifications with a tax professional or retirement planner to maximize the benefits of tax-deferred accounts.
Budgeting for a Secure Retirement
There isn’t a single ‘right’ way to approach budgeting in retirement. Different strategies work for different retirees depending on a variety of factors, including their projected life expectancy, current income levels, the cost of funding travel, current standard of living, and legacy plan.
It may be helpful to discuss these strategies with a financial advisor to find out if they would work for you:
- The four-percent rule: This strategy involves limiting annual withdrawals to no more than four percent of your portfolio. Setting a standard rate of withdrawal could allow you to balance growth and risk while still generating adequate income to maintain your retirement lifestyle.
- Creating separate lists of needs and wants: Drafting new needs and wants lists at the beginning of each year may help you more easily prioritize essential expenses like housing, food, and healthcare over discretionary spending.
- Implement tracking measures: Budgeting tools or apps can allow seniors to monitor their spending in real time and make adjustments as needed throughout the year. Maintaining a real-time picture of your financial situation helps ensure you don’t face unpleasant surprises during your next income and budget review.
Schedule a Retirement Income Review With the Financial Advisors at Fullerton Financial Planning
Retirees don’t have to tackle these calculations on their own. Fullerton Financial Planning advisors in Phoenix, Scottsdale, Tempe, and Peoria would be happy to sit down with you to review your income and expenses over the past year and help you ascertain the sustainability of your current savings. We can also help you understand how inflation and changing costs could affect your savings during the upcoming year.
Schedule your free consultation by calling us at (623) 974-0300.
