Building multiple sources of retirement income
Successful retirement planning involves setting up multiple sources of income. Having more than one source of income is not only beneficial in terms of quantity of income, it creates diversification for tax purposes and a variety of drawdown options.
One Source of Income
People with one retirement income source are constantly wondering if they’ll have enough money and when they will run out, but the challenges go beyond that. With one income source, all of your eggs are in one basket. Let’s take the 403(b) as an example.
Drawbacks (403(b) only example)
Always worried about running out of money
The entire nest egg is subject to the ups and downs of that one account
All withdrawals are subject to income tax rates
No guaranteed payout amount
Required minimum distributions (RMDs) beginning at 70.5 years old
Multiple Sources of Income
When a retiree has multiple sources of income, many of the drawbacks above disappear. Assuming this person also had a Roth IRA and a fixed annuity, they would not only have additional income, but they would diversify across various drawdown methods and tax implications. The annuity would provide a steady stream of payments and the Roth IRA could be accessed tax free.
Let’s look at a tax diversification example;
A retiree is in a tax bracket that increases if her income is over $40k, but she needs $50k per year to live on.
With only a 403(b) or other taxable account, she would need to take out the full $50k and pay the higher tax rate.
If she also had a Roth IRA she could take $40k from her taxable 403(b) and the other $10k out of her non-taxable IRA. as a result, she wouldn’t pay the higher tax rate on any of her income.
As always, seek tax advice from a CPA, but you can see why tax diversification would be beneficial.
Income Planning
Having multiple income sources sounds great, but most people don’t have the ability to save more. The important thing to remember is that even a small amount in a different account can provide you with more options. And if you don’t have additional money to save, you could re-allocate your existing savings. Keep in mind too that social security, assuming it’s still there, will provide you with another predictable source of income as well.
If you need guidance on which accounts to use and how much to allocate to each, book an appointment with me to discuss your particular plan or any other money questions.
