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Identify income gaps before retirement begins

The moment that you stop working and start living off the money that you’ve set aside for retirement can be referred to as the Retirement Cliff. You’ve worked and earned money your whole life, but the day that you retire, that income comes to an end. That’s the day that you have to have other assets that fill the gap, and that’s the day we plan for when designing an income plan. Every financial strategy for retirement needs first to accommodate the day-to-day need for income. 

The first thing we want to start with are the known sources of income. What sources of income will you have coming in during retirement? Is there a pension? Rental income? Social Security? 

You might also receive an inheritance sometime during your retirement, but that’s not helpful to income planning. What we’re looking for are streams of passive income where the money comes in fairly regularly. For example, your Social Security benefit is one source of Green Money that most people can rely on during retirement. Green Money comes from the safer, more reliable assets that you have accumulated and is designed to provide you with a steady income. Once we calculate your Social Security benefit and select the year and month that will maximize what you receive over the course of your lifetime, it’s time to look at your other retirement assets that will reduce or eliminate the dropoff of the Retirement Cliff. 

Do you have an IRA? A Roth IRA? A 401(k) or 403(b) or 457 plan? Dividends from stock holdings? A health savings account? 

If your monthly Social Security check and your other supplemental income leave a shortfall, it needs to be filled in order to maintain your lifestyle into retirement. If you have a known income gap that you need to fill, you want to know how to fill that income gap with the fewest dollars possible. You basically want to buy that income gap for the least amount of money possible. You don’t want it to cost you too much, because you want to get the most out of your other assets, including plans for your Leave On Money. You can achieve the maximum amount of income for the minimum amount of dollars by working with an investment advisor who understands your particular timeline and retirement goals.
Part of identifying your income gap includes the process of honing in on your lifestyle expenses. While this amount will be different for everyone, the general rule of thumb is that a retiree will require 70 to 80 percent of their pre-retirement income to maintain their lifestyle. You might find there is a rather large difference between what you are spending now versus what you are actually spending for usable income. If you are paying contributions to your 401(k) or retirement plan (like sending money into your IRA or other investments), then those costs won’t be part of your retirement budget.  

Another thing to consider is the timeline. How long will you need your income? When are you hoping to retire? Once we have all of the numbers to help us identify how much and how long, we can plan for how to fund the income gap.

For example, let’s say you have an income goal of $6,000 a month. That’s an income of $72,000 annually. Imagine that your known sources of income including Social Security benefits for you and your spouse will cover $40,800 of those expenses. That leaves an income gap of $31,200 or $2,600 a month. How will you use your investments to generate an income stream of $2,600 a month? How will you fill your income gap? If you want to retire in four years, then your investment advisor can take a look at your options and let you know if you’re on track or if you need to do something different now so that you can meet your goal in four years. They can give you recommendations about both what you need to be doing and what your money needs to be doing so that you can better achieve your goals.
Schedule a no-cost or commitment visit today with the financial experts at ReJoyce Financial.
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