Plan Your Retirement Income Strategy Carefully

By Abbey Rollins, CFP®

As an owner, manager or director of a telecom company, you may have several different sources of retirement income available to you. This can result in an opportunity for strategic planning. Having a variety of assets and income sources provides you with more flexibility in preparing for financial independence.

The key is planning. It is important to start thinking about how you will access these different resources. If you wait until you have retired to start planning, it may leave you overwhelmed and uncertain of how to structure the most appropriate income strategy.

Common Retirement Income Sources

A coordinated plan that utilizes both income and assets will provide you with the best opportunity to achieve your goals. This may include:

  • Pension plans
  • Profit sharing plans
  • 401(k) plans
  • IRAs or Roth IRAs
  • Deferred compensation plans
  • Social Security

Pensions, Social Security and deferred compensation plans provide a future income stream, while 401(k) plans, profit sharing plans and IRAs can generally be accessed as needed. At Aldrich, our goal is to create a plan to:

  • Maximize the net amount of retirement income you receive
  • Minimize the tax liability on your distributions
  • Manage your tax bracket over time
  • Plan for the income needs of a surviving spouse

Employing an appropriate investment strategy is also an integral piece of your financial plan. We review your portfolio to ensure you have the allocation that provides the best opportunity to achieve your goals.

Distribution Strategies

Pensions: You will have several distribution options for accessing your pension benefit. These payouts can usually be structured based on life expectancy, for a set number of years or potentially taken as a lump sum. Considering an option that provides payments to a surviving spouse can be important, depending on the structure of your other assets. These options result in a slightly lower monthly benefit but will also provide income protection for your spouse.

401(k), Profit Sharing Plans and IRAs: You have more distribution flexibility with your 401(k) plan, profit sharing plan and IRAs. This provides you with the opportunity to utilize these assets to supplement your income as needed. Once you reach age 70½, you will need to take your annual required minimum distribution (RMD), but you can also take larger distributions as needed. Failure to take RMDs can result in a significant tax penalty so be sure this is incorporated into your plan.

Roth IRAs provide ultimate flexibility, as there is no required distribution and withdrawals are generally tax free. If you are subject to a higher tax bracket, these accounts can strategically be used to manage your tax liability from year to year.

Deferred Compensation: If you have deferred compensation, you will likely begin receiving distributions one year after retirement or when you turn 65, depending on the plan. These distributions usually continue for a period of three to ten years.

Managing Tax Liability Throughout Retirement

It is important to consider the tax implications of your distribution strategy. At Aldrich, we believe “It’s not what you make, it’s what you keep,” and this is especially true when it comes to your retirement plan distributions.

Distributions from pension, profit sharing plans, deferred compensation plans,  401(k)s and traditional IRAs will be taxed as ordinary income. However, distributions from Roth 401(k)s and Roth IRAs will generally be tax-free because taxes were paid on this money before it was contributed to the accounts. It can be beneficial to have this tax free source of income. We recommend working with your tax advisor to ensure all requirements are met prior to taking Roth distributions.

Timing is another important element. With pension benefits and deferred compensation plan distributions, you cannot control the timing of payments once benefits begin. This means that you will receive payments even if you don’t need the income and you don’t have the flexibility to defer the tax liability to a later date. Once these distributions begin, they typically cannot be changed, which is another reason planning is so important.

Social Security

Finally, remember to include Social Security into your plan for retirement income. You can start claiming Social Security benefits as early as age 62 or as late as age 70. However, the earlier you start receiving benefits, the less your monthly payment will be.

One strategy for individuals who have multiple sources of retirement income is to wait as long as possible to start receiving Social Security benefits. Delaying benefits beyond Full Retirement Age (FRA) results in an eight percent annual increase in the benefit amount, up until age 70. An additional benefit is that the maximized benefit can last for two lifetimes. If the higher income earner passes away first, the surviving spouse can claim that maximized benefit for the remainder of his or her lifetime as well.

There are many nuances involved in planning Social Security distribution strategies, including spousal benefits and possible taxation of Social Security benefits. Be sure to speak with your financial and tax advisors for more details.

Creating and implementing a strategic income plan is an important part of your retirement. If you have questions about income strategies, benefit claiming options or your overall financial security, we would be happy to analyze your situation and devise the best strategy for you and your family.

MEET ABBEY

As a Senior Wealth Manager and CERTIFIED FINANCIAL PLANNER™ practitioner, Abbey provides financial guidance to high net worth families, business owners and medical practitioners. She works with clients to help them identify and achieve their retirement, investment, insurance and estate goals.

Connect with Abbey here.