The Three Pillars of Retirement Income

Your hosts are Bowman Wealth Group financial advisors who , for more than two decades , have provided financial leadership for those they serve .

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So every episode we like to focus on a different topic . There's probably some overlap , but we like to focus on topics that folks share in common , have questions about with respect to the financial realm . So today's particular episode is focused on really income planning for retirement .

But we're going to focus on what we'll refer to as three pillars of income in retirement , and you know what are they , how big of a role do they play in retirement planning ? And we'll get into some of the specifics .

And so I'll say this with a caveat , because you know , our philosophy here at Bowman Wealth Group is that you should really focus and worry about five worlds , and those five worlds for us are , you know , income planning , investments , tax planning in terms of tax efficiency healthcare and then estate and legacy planning .

So you know that first one , I mentioned income planning . That's kind of the focus of of today's podcast , and we'll cover the three pillars , or the three legs of this retirement stool and get into that today . So replacing your paycheck in retirement certainly isn't an easy task , you know .

While it does take growing your savings over your working years , transforming those savings into income later , when you're retired , is an entirely different question to ask your money to do right . So if your retirement income plan isn't comprehensive , doesn't account for everything , you may come up short on your financial goals long term .

So that's why efficiently utilizing these three pillars that we're going to talk about today , these three pillars of retirement income , is crucial to providing yourself the income that you're going to need throughout those retirement years . So the first one we're going to cover is a common one . Everybody should know this social security .

It is one of the three pillars of retirement income and we're going to talk a little bit about maybe optimizing some of those benefits . But optimizing that can take some strategy , um , and it requires some thinking . Everybody's situation is going to be a little bit different .

So , with respect to social security , you know these benefits are based on your average income over your highest , earning 35 years of working , and it's designed to replace , about , you know , 40% of your income or so if you're claiming a full benefit . So we'll talk about the different ages .

We've referenced this in a past podcast but just to kind of cover it again , you know you can claim social security at any age , really , starting at age 62 . If you take it as early as 62 , which is the earliest you can elect to take that benefit , you'll be receiving , you know , receiving the minimum benefit for you at that age .

You can , however , choose to wait , to delay it , so you can wait as long as 70 , really , and we'll get to that . But a person's full retirement age , what's deemed as their full retirement age amount , is 66 and 67 . So if you're able to wait until then , that's a more substantial monthly amount you can expect to receive .

You can , however , choose to delay even further and wait until age 70 . And at age 70 , that's essentially the maximum benefit that you can receive . It is the maximum that you can receive . It will not grow beyond that . You can certainly wait beyond 70 if you don't want or don't need the income , but it doesn't continue to grow any more beyond 70 .

So certainly , figuring out when you want to claim or when you can claim Social Security is a major part of your income strategy , and that answer is going to be different for everybody . It depends on a lot of factors . Are you still working ? Are we using other things to kind of fill the gap ?

Fill your income gap until you choose to elect at maybe a higher amount . Maybe you want to claim early if your spouse is still working .

Or you want to claim early if you just rolled over your retirement account holdings from a traditional account to a Roth account , maybe a Roth IRA that requires you to wait five years before you start drawing on those Roth IRA funds because of that five-year rule .

So strategizing your retirement accounts and social security together is the key to optimizing your retirement income . So that's kind of social security at a high level , right , but it is one of those legs of this , the three-legged stool of retirement , the three pillars , right . So , moving on to the next one , think of it as the employer side .

So this next section is pensions and 401ks . But not just 401ks . This is really any 400 series employer contribution plan , employer plan , employer sponsored plan . So this can be a 457 , a 403B or 43A or 401k , right , this may even be a TSP if you're a government employee .

So these are accounts that , again , are sponsored by your employers , usually have incentives and penalties that are aimed at encouraging somebody to save for retirement and utilize those savings as income later down the road when you do retire .

Now going back to pensions , pensions were very common in the 70s and 80s and there was a tipping point when companies , more and more companies , started to utilize the 401k plan as an alternative to a pension plan and we'll talk about kind of the differences between the two .

But pensions were a common vehicle for retirement savings and you know , now , more often than not you're seeing , 401ks are much , much more common . So some people are lucky enough to still receive a pension they're few and far between nowadays .

But pensions were structured for income , for guaranteed income for life essentially , and the employer really carried all of the investment risk . So pensions are defined benefit plans and what happened was those slowly , as I mentioned , started shifting to employers using 401k plans .

So if a pension was seen as a defined benefit plan , 401ks and some of these other 400 series retirement plans are defined contribution plans . So that word in the middle was the difference . And you know pensions are less popular now because all of the risk , as I mentioned , was with the employer .

They had to try to figure out you know how long do we expect this person to live , you know what's the guaranteed amount we can pay them . And it was really a lot of work , I think , on the employer-sponsored plan side .

When the shift occurred and we started using 401ks and similar plans , you know all that risk shifted from the employer to the employee and it really became the employee's responsibility to make those contributions

on their end . Now there are certain tax breaks that we get with traditional 401ks If we're contributing . Those are pre-tax contributions and you get a tax break in that fiscal year , which is great for a lot of folks . But we're just deferring the taxes down the road and letting us deal with that when we start to take those withdrawals in retirement .

There is , however , an alternative . More and more companies , even nowadays , are offering a Roth 401k option and you may have heard that term before Roth . It's very popular . You hear it a lot with Roth IRAs and we'll get to that . But with a Roth 401k , again , it's still tied to an employer and still an employer-sponsored plan .

But the Roth portion just means after tax , so it means you are accepting the tax burden this year . It's not a tax deferred account . And there are 401ks that often have a split .

Maybe there's some pre-tax and some post-tax money in there , but it's important to note that if you make post-tax contributions in the Roth portion of a 401k , pay the taxes now or in that calendar year and you don't have to worry about them again down the road , which is a fantastic benefit .

Those get to grow tax-free and then when you are retired and need those funds and can withdraw them at that point , they're also free of tax . So I think one other thing to note is the lovely RMDs . So that's an acronym that we've referenced in a past podcast , and RMD stands for required minimum distribution .

Now , with a 401k , if it's a traditional 401k or a pre-tax , you do have to worry about RMDs , and what that means is when you get to a certain age in this year , 2024 , the age just moved out to age 73 , which means if anybody turns 73 in this calendar year , they have to begin taking those required minimum distributions per the IRS and the tax code .

So they have to be prepared to pull a certain percentage out every year from those traditional 401ks and even traditional IRAs . But we'll get to that . So I think , just keeping in mind the employer sponsored plans , whether that's a pension or a 401k , either traditional or Roth . You know we want to be conscious of those RMDs .

Lastly , the last leg of this last pillar we'll reference is the personal savings side , and that's kind of the third pillar of retirement income . And when it comes to personal savings , it's not just a savings account . You know we'll get a little bit deeper into that . It can be , but here we're going to look at the other side of retirement accounts .

So we spoke about the employer sponsored retirement account , right , the 401k or pension 457 . Those often give you less control over your finances , over your investments . They do come with benefits , right , with those employer sponsored plans , a lot of employers offer a match , which is fantastic because you can look at it almost as free money .

If you put in 3% , you know the employer will often match 3% , or sometimes up to 4 or 5% or 6 , depending on your plan . So while you have some benefits there , there's also some limitations in terms of , you know , investments , in terms of expenses , in terms of where you can hold those funds .

So , with an IRA or an individual retirement account , these are individual accounts that you set up on your own outside of the employer and you contribute to outside of the employer . So these accounts are tax advantaged if you use them properly for your retirement . So we talked about a traditional or a pre-tax and a Roth or a post-tax with respect to 401ks .

The same is true on the personal retirement side too . So you can have a traditional IRA individual retirement account or a Roth IRA individual retirement account , and figuring out which one to utilize is can be tough , and it's almost a guess in terms of trying to figure out what your income will be at when you do retire .

So the maximum for anybody who's 50 years old or younger in this year , 2024 , is $7,000 in terms of a contribution . If you're over the age of 50 , you can contribute $8,000 each year as of 2024 . That holds true for both traditional and Roth IRAs . It's not $7,000 into both , it's all of them .

But with RMDs , if you're putting money into a Roth IRA , however , you don't have to worry about RMDs later down the road , right , because we're already paying the tax in this calendar year , this fiscal year . So you pay them once . You're not going to have to worry about those taxes down the road .

Let's talk about some hypotheticals Maybe , where we had some issues with Social Security , pensions , 401ks and personal savings and just didn't utilize the three very well . Suppose somebody maybe took too much income in a given year which increased their tax burden . You know how can this happen ?

Maybe from not factoring in RMDs we talked about RMDs quite a bit Maybe from liquidating an account and not rolling over the funds in 60 days during that timeframe , or maybe adjusting their portfolio and they ended up paying out more interest or more dividends in the form of taxable income that we weren't prepared for .

Maybe they claim social security too early , too late . Maybe they had some old , lost 401ks from previous employers that they forgot to account for when it comes to RMDs and got penalized , from previous employers that they forgot to account for when it comes to RMDs and got penalized .

So there's a lot of different ways where these hypothetical clients could run into some issues if we're not looking at everything comprehensively , looking at each leg of this income stool , so to speak .

So again , this is kind of a high level , but a quick look at income planning at a high level and there's certainly at income planning at a high level and there's certainly different income streams that everybody could have , but these are three common ones that most of the population will encounter in some way , shape or form when it comes to retirement planning .

So you know , when all you had to do during your working years was make sure that you saved enough each month , it may have felt easy to manage your finances on your own , but when it comes to shifting , shifting gears and shifting your retirement plan to provide you with income now it becomes your paycheck it's certainly easier said than done .

So whether you're worried about where your income sources are going to come from , how to protect income from market risks or just different unique risks to your retirement portfolio , there's certainly many of us in the space that work with these types of things day in and day out and can help tackle these roadblocks .

So again , I want to thank you guys all for listening Again . If anything here resonated with you today , if you have questions , comments or you just want to dive deeper into your particular unique situation , like I said , shoot us an email at that email address , that's , ask at Bowman wealthcom . Certainly appreciate all the support .

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The information contained in this material has been derived from sources believed to be reliable , but does not guarantee accuracy and completeness and does not report to be a complete analysis of the materials discussed .

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