After spending decades working toward retirement, many Americans probably have a picture in their mind of how they want it to go once it finally arrives. But despite all that hard work and planning, there are still headwinds to navigate once you retire.
After all, people are living longer than ever before, and as a result need to plan for the potential of spending 20 or more years in retirement. And it's not just that longevity that poses a challenge—other factors, from inflation to market volatility, can combine to complicate retirement planning.
And those risks can be a real cause of anxiety. In 2023, RBC Wealth Management–U.S. asked clients about their biggest retirement concerns and found 72 percent of respondents identified running out of money as a top fear while 62 percent were worried about the cost of health care.
A personalized retirement income plan can work to address those types of concerns by helping you understand when and how much money you'll need in your retirement and where that money will come from, says Angie O'Leary, head of Wealth Planning at RBC Wealth Management–U.S.
“Unlike previous generations, who were able to rely on pensions and Social Security benefits for steady retirement income, today's retirees need to navigate risks and establish a well-thought-out retirement paycheck that will likely come from a multitude of sources," O'Leary says.
An additional challenge facing today's retirees, she explains, is the fact that they've accumulated wealth in different types of investment accounts, which are often scattered among multiple institutions.
"When it comes to cracking open their nest egg and using those funds, it's important to understand the different tax consequences and the potential impact on Social Security and Medicare," O'Leary says. "This can add to the complexity of creating a paycheck that maximizes after-tax income throughout retirement. Consolidating assets with one institution can help ease that complexity."
Whether you're on the cusp of retiring or still years away, here's how a retirement income plan can help you minimize risks, maximize your preferred lifestyle and create a lasting, comfortable retirement.
Planning with longevity and health care costs in mind
One of the most important elements of a retirement income plan is that it helps address key risks to your retirement, explains Griffin Geisler, a wealth strategist with RBC Wealth Management–U.S.
“The biggest issue people misunderstand is longevity," Geisler says. “Many clients assume they'll live to 75 or 80 at most and therefore believe they only need to plan for 10 or 15 years of retirement. But with a married couple who are both around 65, it's highly likely that at least one spouse will live to 90."
And as Americans live longer, their health care costs will increase as well. According to data from the U.S. Department of Health and Human Services, 70 percent of people who are 65 today will need some form of long-term care in their lifetime. The national median annual cost for a private room in a nursing home is $105,850, and the average length of stay is 2.5 years.
A personalized income plan will work to address such risks and minimize the potential impact to your retirement. For example, a Health Savings Account, planning for long-term care and careful Medicare decisions can ease the burden of health care expenses.
“Our data on average health care costs and longevity helps us plan for those expenses in retirement," O'Leary says. "We project health care costs at a higher inflation rate than other expenses, such as housing."
While you can't eliminate risk entirely, thorough planning can help manage that risk and prepare yourself for the unexpected, she adds.
Diversifying your income
Another important component of a retirement income plan is that it can help identify several different categories of income to help you create a "paycheck" to rely on throughout your retirement.
In most cases, an income plan will begin with your most reliable sources of income, such as Social Security and required minimum distributions (RMDs) from retirement accounts, which start at age 73.
Additionally, an annuity can be a consistent source of income, along with reliable income from rental properties or part-time work.
“If you need more income, you can use the dividends and interest from your investments," Geisler says, although ideally those resources should only be used after the more reliable sources of income are exhausted. If those dividends and interest are not needed, you can continue to reinvest the funds, or use them for other priorities, he explains.
“Your financial advisor can map out a strategy to help you create your optimal paycheck while preserving wealth for later years and your legacy wishes," he adds.
Preparing for taxes
A personalized income plan will also consider the potential impact of taxes on your retirement, including how your different accounts can be taxed in different ways and how a change in your income can affect your tax bracket.
“Your income may drop initially once you stop working and enter retirement, but you could be in a higher tax bracket later, when your RMDs kick in," Geisler says.
If you're in a lower tax bracket early in retirement, you could look at accelerating the distribution of your IRA funds before your RMDs begin, he explains. Or, you could take advantage of being in a lower capital gains tax rate to sell assets.
Another way to maximize income while also considering the impact of taxes on future generations that may ultimately inherit your assets is through a Roth conversion. This strategy aims to take advantage of lower tax brackets early in retirement when taxable income may be lower by converting assets from pre-tax to Roth. Those assets can then be withdrawn tax-free later, either when taxable income is higher later in retirement or after death through tax-free distributions to beneficiaries.
“When you need to tap into your investment and retirement accounts, the timing and order of how you draw down those accounts is critical and can make a big difference in the taxes you end up paying, and when you pay them," O'Leary says.
Everyone's situation is different, but an income plan that's personalized to your unique circumstances can help you take important steps to plan for a comfortable retirement. By working with a financial advisor, you can create a plan that mitigates taxes, minimizes potential risks, and creates a retirement paycheck that addresses your individual needs and goals.