The purpose of the income plan is to work in conjunction with Social Security benefits and any pension, if there is one, to provide the necessary income to cover all non-discretionary expenses and, at the minimum, your basic retirement lifestyle. In addition, the income plan should address the loss of a pension or Social Security check upon the passing of the first spouse. From a financial perspective, the loss of a pension and/or loss of a Social Security check could be a life changing event for the surviving spouse.
Another consideration is that an income plan will create more choices when it comes to investing. If you have an income plan, you will know you have enough income to cover expenses along with your basic lifestyle as we’ve described earlier, then you could choose to be more specific or aggressive with investment opportunities. Should investments suffer a likely loss, it would not affect your lifestyle while you wait for the opportunity to reengage the investment plan. Your invested assets should be what pays for what I call your “bucket list” or perhaps enhanced lifestyle. For younger folks, a market loss shouldn’t be feared as over time it will likely recover, however, for boomers and retirees it’s different. The market or investment loss could delay retirement for boomers. For retirees the concern changes from the loss to the time it takes to recover. The 2008 crash took four to five years to recover which was about 20% of their life expectancy. Time, in this case, was not their friend. The combination of having both an income plan and investment plan will ultimately provide a greater success in achieving the lifestyle you desire throughout your retirement.
At one point, bonds were the preferred choice for income, however, bonds today are very low. On top of that when interest rates begin to rise bonds values can be adversely affected. Today many financial advisors and investment firms are turning to annuities, instead of bonds, to provide an income stream. This allows the transfer of bond risk due the low interest rate environment from YOU to the insurance carrier providing the underlying guarantees or higher non-guaranteed income and earnings opportunities.
Funding Your Income Plan
Know Your Numbers! For any plan to be successful YOU must know your numbers. Know what your Social Security income will be along with any pension payments or lump sum option. Then know your current expenses and what will change once you retire or if you plan to make any lifestyle changes such as downsizing or adding a vacation home. Knowing what the anticipated expenses will be once income ends or changes is important. These are the numbers that will be needed in order to set the foundation of your income plan.
For the vast majority, retirement funds are held in an IRA or 401(k), 403(b), 457 or other “Qualified Plan”. A qualified plan is an employer-sponsored retirement plan that qualifies for special tax treatment under a specific section of the Internal Revenue Code or IRC. This allows for growth in a retirement account to grow tax deferred, not tax-free. It also allows for tax deductions on contributions along the way.
Withdraws from a qualified plan may be allowed, however, prior to age 59 ½ there’s a 10% penalty that will be applied in addition to income taxes being due. There are some circumstances that will allow for withdraws without the penalty such as college expenses.
When considering an income plan for retirement the 401(k) or qualified plan could be positioned as an IRA. A rollover from a 401(k), 403(b), 457 or similar qualified plan to an IRA is NOT a taxable event. The IRA can be held in an investment account, bank CD, a commodity or an annuity. Remember that the tax rules follow the money and apply regardless of the type of vehicle used because it’s still an IRA.
Although an IRA shares similar in tax liability if withdrawn for personal use, there are usually more options available as an IRA than a 401(k) or similar account type particularly when it comes to investment options or as an inheritance. In either case, the financial vehicle is not what governs the tax application, it’s the IRC. Therefore, no matter what the vehicle choice may be, any withdraw will be added to your overall income and taxed accordingly.
An annuity can be an IRA just as an annuity can be held with simple cash funds not previously held in any retirement plan and still benefit from the same tax deferment as an IRA. An annuity can also be a Roth IRA. The annuity is the simply the vehicle just like an investment account or bank CD.
Using an annuity to fund your income plan is usually based on a rider within the annuity which may, in some cases, have a fee. These riders provide many enhanced benefits. This is why today’s annuities have become a preferred choice as opposed to those available 10 or more years ago.
Here is a list of key benefits over and above the basic benefits any annuity already provides:
– The income, in many cases, can be started or stopped as needed.
– The income can be guaranteed over one or both lives.
– The income can increase over time usually based on non-guaranteed values.
– The income can be started at a specific age based on the overall plan.
– The principle is still available even as the income received may reduce the value over time.
Some annuities with these income riders can provide additional benefits including a death benefit to protect a surviving spouse or be passed on to heirs. As you can see, an annuity, whether as an IRA or not, can provide the foundation of your income plan that will ultimately help you THRIVE throughout your retirement.