We all know that there is no one-size-fits-all retirement. You may want to travel the world. Your neighbor may want to garden and read. Likewise, there is no one-size-fits-all retirement plan. Finding the right mix for you depends on a myriad of factors, including your savings, expenses, health, family, and values.
The good news: Whatever your situation, you can help improve your retirement readiness by learning about three essential building blocks for retirement income plans.
In general, a solid retirement income plan should provide three things:
- Guaranteed income1 to help ensure your core expenses are covered.
- Growth potential to help meet long-term needs and legacy goals.
- Flexibility to adjust as your needs change, or life throws a curveball.
1. USE GUARANTEED INCOME1 TO HELP PAY FOR YOUR ESSENTIAL EXPENSES
When you create your plan, first and foremost, you'll want to make sure your day-to-day expenses—nonnegotiable costs, such as housing, food, utilities, taxes, and health care—are covered by lifetime guaranteed income sources. There are essentially three sources of guaranteed income.
This is a foundational source of income for most people. When you decide to take it may have a big impact on your retirement. It can be tempting to claim your benefit as soon as you're eligible for Social Security—typically at age 62. But that can be a costly move. If you start taking Social Security at 62 rather than waiting until your full retirement age, you will receive reduced monthly benefits. (Full retirement age ranges from 66 to 67, depending on the year in which you were born.) Find out your full retirement age, and work with your financial advisor to explore how the timing of your Social Security benefit fits into your overall plan.
One of the most valuable benefits UC offers is UC’s pension plan—the UC Retirement Plan, or UCRP. If you were hired before July 1, 2016, you are automatically a member of UCRP. Those hired after July 1, 2016, can choose to participate in either the pension plan or a 401(k)-style savings plan.
UCRP is a monthly pension benefit that offers a predictable level of lifetime retirement income. When you retire, you will receive monthly retirement income for as long as you live. Your benefit is based on your pay, the date you were hired, and the number of years you have worked for UC.
Deferred Lifetime Income:
UC offers Deferred Lifetime Income2, an optional deferred income annuity that lets you use a portion of your UC 403(b), 457(b), DC Plan balance invested in the UC Pathway Funds to purchase a Deferred Lifetime Income annuity. This annuity is designed to help you convert a portion of your savings into fixed monthly payments beginning at age 78, when you may need it most. Deferred Lifetime Income is designed to supplement other sources of retirement income, like Social Security and the UC Retirement Plan (UCRP), to help cover your spending needs.
TIP: Learn more about Deferred Lifetime Income with UC’s online tutorial.
Components of a diversified retirement income strategy.
UCRP pension and/or
Deferred Lifetime Income annuity through the UC Pathway Funds
For illustrative purposes only.
2. SEEK GROWTH POTENTIAL TO MEET YOUR LONG-TERM NEEDS
As you build your income plan, it's important to include some investments with growth potential that may help keep up with inflation through the years.
You'll want to consider how you can pay for those fun things you've always dreamed about doing when you finally have the time—things like vacations, hobbies, and other nice-to-haves. It's a smart strategy to pay for these kinds of expenses from your investments. That's because if the market were to perform poorly, you could always cut back on some of these expenses.
It's important to consider a mix of stocks, bonds, and cash that considers your time horizon, financial situation, and tolerance for market shifts. An overly conservative strategy can result in missing out on the long-term growth potential of stocks, while an overly aggressive strategy can mean taking on undue risk during volatile markets.
Creating and managing your investments in retirement requires some effort along with the discipline to stay on plan even during volatile markets. You need to carefully research investment options and choose ones that match your goals. You also need to monitor your investments, and rebalance the mix of stocks, bonds, and cash when needed. It’s important to manage taxes on your investments too.
TIP: At UC, you can review your investment decisions one-on-one with a UC-dedicated workplace financial consultant. This is a service of the UC Retirement Savings Program, so it’s available to you at no additional cost.
3. BE FLEXIBLE AND REFINE YOUR INCOME PLAN OVER TIME
You want to have a plan that can adapt to life's inevitable curveballs. Five years into your retirement, you might receive an inheritance, have your parents move in, or experience another significant life event. When these things happen, you need a plan that gives you the ability to make adjustments along the way.
That's why it's important to combine income from multiple sources to create a diversified income stream in retirement. Complementary income sources can work together to help reduce the effects of some important key risks, such as inflation, longevity, and market volatility.
For example, taking withdrawals from your investment portfolio gives you the flexibility to change the amount you withdraw each month, but does not guarantee income for life. On the other hand, income annuities provide guaranteed income for life, but may not offer as much flexibility or income growth potential.
TIP: Flexibility may also be important when you begin to take minimum required distributions, or MRDs (also known as required minimum distributions, or RMDs), once you reach age 72. If you're planning to spend your MRDs to cover your ongoing retirement expenses, you may want to work with an advisor to determine tax-efficient ways to take those withdrawals, year after year.
A note on principal preservation:
As part of your overall financial plan, you may also wish to preserve some principal for use in an emergency or to leave a legacy for heirs. You can accomplish this separately from, or in conjunction with, a diversified income plan.
But remember, investments that aim to preserve your principal,2 such as money market funds, CDs, or Treasury bonds, come with a different sort of risk. These investments generally offer relatively low yields—and your principal might not be large enough to generate enough income from interest or dividends to fund your desired retirement lifestyle. Plus, if you invest too conservatively, your savings may not grow enough to keep pace with inflation.
UNDERSTANDING THE TRADEOFFS AS YOU BUILD YOUR INCOME STRATEGY
Everyone's situation is unique, so there’s no one income strategy that will work for all investors. You'll need to determine the relative importance of growth potential, guarantees, or flexibility to help you pinpoint the strategy that is right for you in retirement. Of course, there are tradeoffs. For instance, more growth potential can mean settling for less guaranteed income. With more guarantees, you get less growth potential and less flexibility. If you have an employer stock plan then there are the risks of concentrated positions to compare against the benefits of potential long-term incentives. Consider, too, your family's history regarding longevity and whether you plan to leave a legacy to your heirs.
FIVE STEPS TO CONSIDER
So, how do you get started? Here are five steps to consider taking to help create a diversified income plan:
- Identify your personal and financial goals. Use UC’s Retirement Review to understand how much income you are on track to receive from your UC benefits.
- Use the Planning and Guidance Center to create a retirement plan that can help you determine whether you will have enough money to last throughout retirement. From anywhere in NetBenefits®, just click the Planning link (login required).
- Determine when to take Social Security; how much of your investment portfolio you want to allocate to an emergency fund, income protection, and growth potential; and who will manage your investment portfolio.
- Implement your plan with an appropriate mix of income-producing investments to balance your financial needs, goals, risk tolerance and investment priorities in retirement.
- Work with a UC-dedicated workplace financial consultant to develop your plan. Review it regularly with your consultant to make sure it is on track to help meet your lifestyle and income needs.