How to Manage Your Retirement Income

Understand Where Your Income Is Coming From

Retirement income generally comes from a variety of sources, providing different ways to generate cash when you've stopped working. If you have a pension, count yourself lucky. Only 12% of workers in the private sector participate in one, according to 2019 research from the Pension Rights Center. Retirees will likely need to rely on other income streams to enjoy a comfortable retirement. This typically includes the following sources.

Retirement Accounts and Investments

Several types of retirement accounts invest primarily in stocks and bonds. Those include employer-sponsored 401(k) plans, individual retirement accounts (IRAs) and regular brokerage accounts. While these types of investments carry some risk, the power of compound interest combined with the benefit of time invested can help grow your wealth prior to retirement.

A balanced investment portfolio is designed to mitigate risk by incorporating safer investments into your retirement strategy, especially as you get closer to leaving the workforce. A general rule of thumb is to allocate 60% in stocks and 40% for bonds for a possible long-term return of around 10% (based on returns over the past decade). If you have decades to go until retirement, you may choose to invest more in stocks, which carry more risk but more potential reward; if retirement is only a few years away or you're already retired, you may want to rebalance in favor of safer investments. You can take distributions from these accounts in retirement, but you'll need to be aware of the tax consequences (more on this shortly).

Social Security

After paying into Social Security during your working years, retirement is the time to draw on this resource. Unlike investment account balances, which can fluctuate with market swings, Social Security is a steady source of fixed retirement income. How much you'll get each month depends on when you begin collecting your benefit—the longer you put it off, the bigger your monthly check. You can technically start taking Social Security at 62, but if you were born during or after 1960, you'll receive your full monthly benefit at 67. As of August 2021, the average monthly Social Security benefit is $1,438.

Personal Savings

Cash reserves you've set aside in a savings account can be another source of retirement income. While you won't earn as much interest as you typically would in an investment account, you can draw on these funds to cover emergency expenses in retirement. Experts recommend having three to six months' worth of living expenses in your emergency fund, but if you're no longer working, you may feel more comfortable with a larger cushion.

Life Insurance

This type of insurance can take a few different forms. A term life insurance policy lasts for a set period of time—say, 20 years—and won't provide any investment income; its sole purpose is to pay your beneficiaries when you pass. Permanent life insurance is different in that it lasts your whole life. What's more, it gradually amasses a cash value that can double as retirement income. Dipping into it will reduce your death benefit, but it can provide liquidity when you need it.

Make a Budget and Stick to It

Budgeting is always a key part of financial wellness, but even more so in retirement. You're no longer receiving a paycheck, which means you'll have to manage your income wisely to make it last. Efficient tax planning plays a key role here.

If you have any money tied up in a tax-deferred retirement account, such as a 401(k) or traditional IRA, you'll be taxed on distributions you take in retirement. Depending on how much you withdraw, it could even nudge you into a higher tax bracket. You can offset this risk by balancing your income sources and leaning on other, more tax-friendly vehicles such as Social Security.

Budgeting in retirement also involves a clear understanding of your expenses. Run the numbers to estimate how much you'll need each month to maintain your lifestyle and live comfortably in retirement. (Don't forget to account for inflation.) Now multiply that amount out over the years ahead. As a point of reference, you can expect to spend 55% to 80% of your current annual income in retirement, according to Fidelity Investments.

Factor in Health Care Costs

Health care costs can add up fast in retirement. If you've been relying on an employer-sponsored health insurance plan, how will you manage once you leave the workforce? Most folks who are at least 65 will qualify for Medicare, but they'll likely encounter some out-of-pocket expenses. For example, premiums are standard for doctor's visits and outpatient care and could cost a few hundred dollars per month. You'll also have co-pays and deductibles for emergency care. According to a 2020 report published in the Retirement Management Journal, the average retiree spends about $4,500 per year on health care expenses. Bear in mind this doesn't include long-term care costs, should they become necessary.

Work With a Professional

Managing your retirement costs and income can be challenging. You may have spent many years receiving a regular paycheck that you based your expenses and savings on—but now you need to manage investments to ensure your money lasts and doesn't take too large of a tax bite. Often the best way to make this transition successfully is with the help of a financial advisor. Whether it's a certified financial planner or an investment advisor you've worked with for decades, getting solid, professional guidance can help prevent missteps and take some of the burden off of you. An advisor can help you create an income strategy that will provide for you for many years to come.

The Bottom Line

Managing your income when you're no longer working isn't as simple as making monthly withdrawals from your retirement accounts. Smart budgeting and tax planning are crucial to financial wellness, and a financial advisor may be worth the cost to help you come up with your plan.