Where will my retirement paycheck come from?
Another critical part of evaluating one's readiness to retire early is to determine how to recreate a paycheck in retirement.
During our working years, our employer takes care of paying us every month, and most of the focus of our savings and investments is to grow our next egg for a future retirement. Now that you are at the point of considering early retirement, you'll need to figure out how to create a monthly income to cover your needed expenses and have the cash to do the things you want to do in retirement.
Depending on your age, typical retirement income sources such as Social Security, pensions or annuities may make up part of your retirement income. Recent studies show, however, that for the typical retiree, Social Security may account for only 25-35% of one's income need.
Additionally, early retirees may not yet be able to access these benefits due to age. Withdrawals from pre-tax accounts such as a 401k plan or IRA, may come with potential tax penalties, and all the income from pre-tax 401k and Traditional IRA accounts can be taxable.
One can potentially develop an income stream from investments, such as bond interest or collecting dividends from dividend paying stocks. And of course, some individual may own rental real estate, CD or money market accounts, or other assets that can produce income.
However, most investment income sources carry some degree of risk. Bonds can default, stock dividends can be reduced or eliminated, rental properties can be vacant, etc.
Even with good savings habits and a diverse investment portfolio, many people struggle to determine exactly how to create a tax efficient retirement paycheck that maximizes the income and growth potential of their portfolio in retirement and is more than sufficient to cover all monthly expense AND is sustainable even through periods of extreme market volatility.
As the decisions about which benefits to use, which investments to tap, and how they impact one's tax situation, are so critical, many investors struggle to create a well-crafted retirement income plan. A CERTIFIED FINANCIAL PLANNER™ with expertise in retirement income planning for early retirees can do the heavy lifting for you in creating, analyzing and implementing a plan that allows you to sit back and collect your retirement paycheck, without worrying about all the things that could have gone wrong.
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About the Author:
David Edmisten, CFP®, is the Founder of Next Phase Financial Planning, LLC, a financial advisor in Prescott, AZ. Next Phase Financial Planning provides retirement, investment and tax planning that helps corporate employees retire with both financial and lifestyle security.