When making long-term financial plans, one of the big questions to answer is: What is a good monthly retirement income? The answer can directly inform your savings strategy. According to 2016 data from the Bureau of Labor Statistics, the average 65-plus household spends $48,885 per year, which works out to about $4,000 per month.
But no two people are alike, so figuring out how much money you’ll need on a monthly basis will depend on your lifestyle, goals and unique retirement vision. Here are some prompts to help you get started from Northwestern Mutual.
PICTURE YOUR RETIREMENT
“When planning for your dream retirement, it can help to work backward,” said Ryan Chang, Northwestern Mutual Financial Representative based in Los Angeles, CA. “How do you envision spending this part of your life? Do you want to downsize and move to a condo on the beach or spend your time traveling?”
Taking the time to really think about how you see yourself living after you leave the workforce will give you a good starting point for forecasting your expenses and then making a plan for getting there.
DO SOME ESTIMATES
One way to ballpark your monthly expenses in retirement is to use the 4 percent rule. During the first year of retirement, the rule recommends withdrawing no more than 4 percent from your retirement savings. From there, you can continue withdrawing the same amount in subsequent years, tacking on extra to account for inflation.
Of course, the 4 percent rule has its limitations. For instance, it assumes your portfolio is split 50/50 evenly between stocks and bonds. Consulting with an experienced financial advisor is a great way to tailor an individualized retirement income plan that will be customized to your unique needs.
CONSIDER COMMON FINANCIAL RISK FACTORS
“After you’ve estimated how much income you’ll need in retirement, the next step is figuring out how to position your assets,” said Chang. “Building a retirement plan for living longer can help you feel more confident that your savings will support your needs and wants in your post-working years.”
You’ll need to monitor how market volatility and inflation are impacting your nest egg and make adjustments as needed. And then there are taxes. And remember when it comes time to withdraw funds from tax-deferred accounts, such as 401(k)s and traditional IRAs, you’ll be taxed on those distributions.
It’s also wise to plan accordingly for health care costs and potential long-term care. Doing so can help you protect your retirement savings.
BUILD A ROBUST NEST EGG
Living comfortably in retirement usually means having a variety of income sources to draw on, such as:
- Reliable monthly income from Social Security, pensions and annuities. If possible, try to use guaranteed income from these sources to cover all of your essential expenses.
- 401(k)s and traditional IRAs are powerful retirement-saving vehicles that allow you to build a nest egg using pre-tax contributions. This lowers your taxable income during your working years.
- Roth IRAs and Roth 401(k)s are funded with after-tax dollars, so you can enjoy tax-free distributions in retirement. These types of accounts can be used in conjunction with taxable accounts to manage your tax liability in retirement.
- Whole life insurance* builds equity over time. After a policy has had time to accumulate value, you can tap into its accumulated cash value if needed. Think of it as a nice cushion to protect against market volatility.
- Cash reserves can provide additional peace of mind. It’s a good idea to have two years’ worth of income on hand in an account that is liquid and accessible, where the funds can be withdrawn without penalty or significant taxes should the funds need to be accessed.
A FINAL CONSIDERATION
“One more consideration as you think about your retirement income is to plan for the legacy you want to leave,” said Chang. “By working with a financial professional, you can create a plan that maximizes your income and also accounts for the assets you wish to leave to your heirs.”
So, while there isn’t just one answer for ‘what is a good retirement income?’, teaming up with a skilled financial advisor can help you forge a clear path for mapping out your personal retirement goals.
*Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).
Northwestern Mutual has been helping people and businesses achieve financial security for morethan 160 years. Through a holistic planning approach, Northwestern Mutual combines the expertise of its financial professionals with a personalized digital experience and industry-leading products to help its clients plan for what’s most important. With $308.8 billion in total assets, $31.1 billion in revenues, and $2 trillion worth of life insurance protection in force, Northwestern Mutual delivers financial security to more than 4.75 million people with life, disability income and long-term care insurance, annuities, and brokerage and advisory services. The company manages more than $200 billion of investments owned by its clients and held or managed through its wealth management and investment services businesses. Northwestern Mutual ranks 90 on the 2021 FORTUNE 500 and is recognized by FORTUNE® as one of the “World’s Most Admired” life insurance companies in 2021.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, WI (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. Subsidiaries include Northwestern Mutual Investment Services, LLC (NMIS) (investment brokerage services), broker-dealer, registered investment adviser, member FINRA and SIPC; the Northwestern Mutual Wealth Management Company® (NMWMC) (investment advisory and services), federal savings bank; and Northwestern Long Term Care Insurance Company (NLTC) (long-term care insurance).