8 Ways to Protect Your Retirement Income

You’ll spend decades – if not your entire career – saving for retirement. But saving enough money is only a piece of the retirement planning puzzle. Protecting your retirement income against the test of time and an ever-changing economic landscape is equally critical. Whether it’s optimizing annuitized streams of income like Social Security, planning for healthcare expenses or lowering your tax liability, there are numerous strategies for building a robust retirement income and protection plan.

Every retiree’s retirement income plan will be unique. While some will rely heavily on Social Security, others may build a large nest egg in tax-advantaged retirement accounts that will generate all the income they’ll need. Income sources may vary from retiree to retiree, but the most common include Social Security benefits, withdrawals from retirement accounts, pension payments, annuities and other investment income.

Social Security represents a fundamental pillar of retirement income for a substantial portion of the American populace. This government-administered program is designed to furnish financial support to retirees, with eligibility and benefit amounts predicated on an individual’s work history and the accrual of Social Security credits. The calculation of benefits is based on a formula that considers the worker’s 35 highest-earning years, thereby providing a measure of income replacement that is commensurate with the individual’s earnings during their career.

Retirement accounts are a cornerstone of retirement income, complementing Social Security benefits and offering individuals the opportunity to save with tax advantages. These accounts encompass a variety of types, including traditional IRAs, 401(k)s, 403(b)s and Roth IRAs. Once a person reaches age 59 ½, they can make penalty-free withdrawals from these accounts, paying taxes on distributions from tax deferred accounts like traditional IRAs and 401(k)s.

Pension plans, once a mainstay of retirement income, have seen a decline in favor of defined contribution plans. These employer-sponsored retirement plans pledge a predetermined monthly benefit upon retirement, which is often calculated based on the employee’s salary and tenure of service.

Annuities are financial instruments that can provide a consistent stream of income during retirement, offering features that differ from other retirement income sources. They are contracts purchased from an insurance company that can be structured as either immediate or deferred, with payments commencing shortly after acquisition or at a predetermined date in the future. Annuities can be either fixed, offering a stable payout, or variable, with payouts fluctuating based on the performance of selected investment options. While fees and various riders can tailor the annuity to the purchaser’s specific requirements, they may also influence the overall return on the investment.

Retirees can also derive income from a variety of investment vehicles, such as stocks, bonds, dividends, and real estate. These assets can yield capital gains and dividends, with real estate investments potentially generating rental income. The significance of a diversified investment portfolio cannot be overstated, as it aids in risk management and provides a balance between growth potential and income stability.

The importance of safeguarding retirement income cannot be overstated, as it is the foundation upon which a secure and comfortable retirement is built. Therefore, understanding and implementing an income protection plan is critical to manage the financial demands of a longer retirement.

Here are eight common income-protection strategies you may want to consider:

Anticipating longevity is an important aspect of retirement planning. According to the Centers for Disease Control, the average life expectancy in the United States rose slightly in 2022, reaching 77.5 years – 74.8 for men and 80.2 for women. However, it’s prudent to plan for a retirement that could last well beyond these averages.

Longevity risk – the possibility of outliving your savings – is among the most common threats that retirees face. Those planning for retirement should reevaluate their financial strategy to ensure that their resources do not fall short if they live up to 30 years (or more) after retiring.

Adjusting retirement plans to accommodate potential longer lifespans involves a multifaceted approach. Retirement planning tools and calculators, such as those provided by the U.S. Social Security Administration, are invaluable resources that help individuals estimate their life expectancy and adjust their savings goals accordingly. These tools can guide decisions on how much to save, when to retire and how to allocate investments to support a longer retirement.

Maximizing Social Security benefits is a strategy that can significantly enhance and protect retirement income. Methods such as delaying benefit claims or working for a longer period can lead to increased monthly payments. For example, delaying Social Security until age 70 can result in up to a 32% boost in lifetime benefits.

This approach requires a detailed understanding of the Social Security system and the effects of delayed claiming and extended work on benefits, but it can be a powerful tool for securing a more comfortable retirement.

Developing a strategy for pacing withdrawals from retirement accounts is essential to prevent the premature depletion of funds. The 4% rule is a popular withdrawal strategy aimed at generating a 30-year stream of income. The guideline calls for withdrawing 4% of a balanced portfolio (50%-75% stocks, 25%-50% bonds) in your first year of retirement and then adjusting your withdrawals for inflation in subsequent years. This and other sustainable withdrawal rate theories provide a framework for retirees to draw down their savings in a manner that balances the need for income with the preservation of capital.

However, spending habits and needs are subject to change throughout the different phases of retirement, and a static withdrawal rate may not meet your specific needs. You may want to adopt a more flexible withdrawal strategy that can produce more income in the years when you need it and vice versa.

Adopting a sustainable yet flexible withdrawal strategy can help ensure you don’t empty your account early, which in turn can protect your overall retirement income.

Inflation poses a significant threat to retirement savings and the purchasing power of fixed incomes. While the Federal Reserve looks to keep inflation at 2% each year, that doesn’t always happen. Look no further than the aftermath of the Covid-19 pandemic when inflation skyrocketed, reaching 9.1% in June 2022.

When inflation spikes, it hits retirees and others on fixed incomes particularly hard. As a result, retirees must plan for the possibility of higher inflation rates diminishing the value of their retirement savings and eroding their purchasing power.

To combat the effects of inflation, retirees can employ various inflation-proofing strategies. First, retirees should account for inflation in their budgets and expect to spend around 3% more each year. While Social Security benefits are adjusted for inflation each year, retirees will have to plan to withdraw a little more from other sources each year to keep pace with the rising cost of living.    

Investing in Treasury Inflation-Protected Securities (TIPS) or I-bonds, which are designed to increase in value along with inflation, can also help protect retirement income against the eroding effects of rising prices. These investment options provide a measure of security against inflation, ensuring that retirees’ income keeps pace with the cost of living and preserves their standard of living throughout retirement.

Annuities can serve as a reliable source of income during retirement, offering various options to suit different financial needs. Fixed annuities provide a guaranteed payout, variable annuities offer potential growth through investments in the stock market, and indexed annuities yield returns based on a specified equity-based index. Each type of annuity has its benefits and drawbacks, making it important for retirees to understand the differences and choose the one that aligns with their financial goals.

When considering an annuity investment, it’s important to evaluate fees, rates and the financial strength of the insurance company. Understanding the fee structure, considering the surrender period, and assessing potential penalties for early withdrawal are all important aspects of this decision. Additionally, the insurer’s financial stability should be scrutinized to ensure that the annuity will provide a steady stream of income for the duration of retirement.

Tax planning is a critical component of retirement income protection, as it can help keep taxable income low during retirement. Being cognizant of the current tax brackets and how different types of retirement income are taxed is essential for effective tax planning.

Strategies to reduce taxable income include taking advantage of tax deductions, making tax-efficient withdrawals, and understanding the tax implications of various income sources. Using tax-advantaged accounts like Roth IRAs and health savings accounts (HSAs) can help minimize taxable income in retirement. By employing these strategies, retirees can manage their tax burden and retain more of their hard-earned savings.

Remember, up to 85% of your Social Security benefits are taxable if your “combined income” exceeds $34,000 as a single filer or $44,000 for married couples filing jointly. Additionally, the higher your income, the more you’ll pay in Medicare Part B premiums.

Medical bills can quickly eat up retirement savings and undermine your income plan. For example, Fidelity’s annual Retiree Health Care Cost Estimate found that a 65-year-old who retired in 2023 should expect to spend an average of $157,500 in medical expenses and care over the rest of their lifetime.

Insurance serves as a vital risk management tool in retirement, addressing health, long-term care and other unforeseen expenses. Products such as long-term care insurance and Medicare supplement plans can help cover costs not included in traditional health insurance, thereby protecting retirees from significant out-of-pocket expenses. These insurance products can be instrumental in protecting retirement income and providing peace of mind.

Choosing the right insurance policies involves evaluating factors such as the insurer’s reputation, coverage limits, exclusions and the cost of premiums relative to the benefits provided. It is important to select policies that offer adequate protection against significant financial risks in retirement. By doing so, retirees can ensure that they are well-prepared to handle the financial impact of health-related issues and other unexpected events.

A balanced investment approach that includes growth-oriented investments is necessary even in retirement. Modern portfolio theory suggests that diversifying investments across different asset classes can help manage risk while still providing growth opportunities. This balance is important for retirees who need to ensure that their funds continue to grow and are not eroded by inflation or other economic factors.

Investment strategies for retirees should provide both stability and growth potential to ensure the longevity of retirement funds. A diversified investment portfolio might include a mix of stocks, bonds and real estate, with the allocation adjusted based on the retiree’s risk tolerance and time horizon.

Putting together a cohesive retirement income and protection plan is nearly just as important as diligently saving throughout your career. From leveraging Social Security benefits and pacing retirement account withdrawals to accounting for inflation and managing risk with insurance, each aspect plays a critical role in safeguarding one’s financial future. Retirees must balance the need for immediate income with the growth potential of their investments, all while keeping an eye on tax implications and the ever-present challenge of inflation.

• Deciding when the right time to claim Social Security is a major decision for most retirees. SmartAsset’s Social Security calculator can help you estimate how much your benefits will be at different claiming ages. Meanwhile, calculating your Social Security break-even age – how long you would have to live to justify delaying your benefits – can also help you make this momentous decision.
• A financial advisor can help you build an income plan for retirement and then protect those streams of income. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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