Just under two-thirds of American workers feel confident in their ability to have enough money to live comfortably throughout their retirement, as many people are concerned about inflation, the economy, and challenges like debt or rising medical expenses. You might question whether you have enough savings to last throughout retirement or if you will need supplemental retirement income to keep up with your expenses. There are ways to help determine if you will have an income gap in retirement and take proactive steps to help fill it.
Retirement income gaps can happen when there is a difference between your retirement income and actual expenses. Determining how much you will need financially each month can feel challenging when unexpected expenses are likely to happen, but by using your budget, you can make a reasonable estimate. As you approach retirement and are tracking your goals, finding a gap isn’t a reason to panic. You can increase your savings, decrease your spending, and continue to bring in money after your last paycheck.
If you discover there is an income gap in your retirement plan or wish to create a strategy that prevents a gap from happening, there are ways you can generate income streams for the future. If you expect to receive income from Social Security, pensions, and retirement savings accounts, you can supplement those sources with other savings solutions, like annuities, bonds, and certificates of deposit (CD). Even if you get a late start on retirement planning, there are still options that will allow you to build passive income for the future.
Creating a diversified retirement portfolio that includes sources of passive income — or cash flow that requires minimal effort to maintain — can help you grow your savings and be better prepared for planned and unexpected expenses. CDs, bonds, annuities, rental properties, and high-yield savings accounts are some examples of passive income that can provide a cash flow not earned from active work. Options like CDs and bonds are investments you can capitalize on at any time in your life, whereas annuities are commonly designed if you’re nearing retirement age.
When an annuity is purchased, typically the policy owner will receive income with a lump sum of money or through scheduled payments over time. Policy owners can then exchange these payments for guaranteed cash flow in retirement, whether monthly, quarterly, semi-annually, or annually. Some annuities can also provide guaranteed income for the rest of a person’s life.
Depending on the type of annuity chosen, interest may be earned, which can further build savings. The policy owner can also select when your income will begin, whether it’s right away or at a later date. Including an annuity in a retirement income plan can help individuals avoid outliving their money and bring a combination of growth potential and protection to their retirement assets.
Even with a solid income plan and additional cash flow, it’s a good idea to keep spending in balance with income throughout retirement. Spending habits may need to be adjusted to help ensure income can support a desired lifestyle without racking up debt or depleting savings. Here are helpful ways that can cut costs in retirement:
Depending on your specific lifestyle, health care costs, and other goals, your retirement spending should match your financial situation. On average, retirees likely spend between 55% and 80% of their annual income that they earned while working throughout their retirement years. Remember that medical events or other emergencies can lead to higher spending. Building flexibility into your retirement income plan can help you be financially prepped for the unexpected while also allowing you to adjust your spending as your needs and lifestyle change.
As you work hard to save for the future and create a retirement income strategy that will support your lifestyle as a retiree, you likely want to find ways to make the most of those earnings. Here are several ideas that can help maximize income during retirement:
If you have retirement savings plans through work or accounts you’ve set up alone, consider contributing the maximum amount possible. Plus, if your employer offers a company match, there is the opportunity to increase your savings.
Including sources of guaranteed income in your retirement plan, like a pension or an annuity, can boost financial security and peace of mind for the future. Certain annuities provide guaranteed lifetime income that will give a “retirement paycheck” you can count on for the rest of your life.
Just like it's beneficial to diversify a retirement portfolio, it can be a good idea to vary how and when savings will be taxed. Various retirement accounts have different taxation rules, and individuals may be able to manage these accounts better to control taxable income in retirement.
It's common for retirement savings accounts to have different withdrawal rules. When considering an income plan for retirement, it can be beneficial to increase withdrawals periodically to account for inflation. Account holders may want to consider a systemic withdrawal strategy where a certain percentage is removed from retirement savings, an annuity per year, or another established timeframe. Making systematic withdrawals allows the funds not being used to keep growing.
When you turn 50, you may become eligible to make catch-up contributions to your 401(k) and IRA. This offers an opportunity to boost those retirement savings, especially if your account balances are not where you want them to be.
As you build your retirement plan and save for the future, it’s never too late to find ways to close an income gap and ensure you have the money you need to achieve your goals. Meeting with a financial professional along the way can help you explore your specific needs and determine which financial moves will get you on the right track toward a more secure retirement.
Neither Midland National, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax or investment advice. Please rely on your own qualified tax professional.
The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.