Hey everyone, welcome back to your classroom. I'm Thatcher Taylor, certified financial planner and founder of ProPath Financial. In today's episode, we're diving into a crucial question that every retiree needs to understand: Where will your retirement income come from?
This question is not just about the numbers; it’s also about your mindset. How you think about your retirement can significantly impact your financial well-being and overall happiness during those golden years.
Before we dive into the specifics of retirement income sources, let’s discuss how a shift in mindset can change your approach to retirement. A client recently shared an Instagram post that sparked my interest. It discussed how the average American retires at 64 and dies at 76, highlighting that many spend their retirement years in poor health, reliant on medications. This perspective can be disheartening, but it also serves as a wake-up call.
Instead of viewing retirement as a time of decline, consider it an opportunity for growth and exploration. Investing in your health is just as important as investing in your 401(k). When you prioritize your well-being, you not only enhance your quality of life but also potentially extend your retirement years.
Now, let’s explore the most common places where retirement income will come from and how each is taxed. This understanding is crucial, but remember, your mindset can influence how you approach these sources.
Social Security can be a significant part of your retirement income. However, not all of it is taxable. If your provisional income exceeds certain thresholds, up to 85% of your Social Security benefits may be taxable.
Mindset Shift: Instead of viewing Social Security as a fixed income source, think of it as a foundation upon which you can build a more robust financial strategy.
Traditional IRAs and pre-tax 401(k)s are fully taxable upon distribution. Planning for these taxes is essential, especially as you approach retirement.
Mindset Shift: Rather than seeing these accounts as just a savings vehicle, view them as tools that can be strategically managed to minimize tax impact and maximize your retirement lifestyle.
Withdrawals from Roth IRAs and Roth 401(k)s are tax-free, provided you follow the rules. This can be a game-changer for your retirement strategy.
Mindset Shift: Embrace the idea of tax diversification. Having tax-free income sources can provide you with flexibility and peace of mind in retirement.
Most pensions are fully taxable as ordinary income. Understanding how this affects your overall tax situation is crucial.
Mindset Shift: Instead of feeling trapped by the tax implications of your pension, think of it as a steady income stream that can be complemented by other sources.
These accounts offer favorable tax treatment on dividends and capital gains, providing flexibility in retirement.
Mindset Shift: View these accounts as a way to control your tax situation. You can choose when to sell investments and realize gains, allowing for more strategic withdrawals.
Annuities can be complex, and their tax treatment depends on the type of annuity you have.
Mindset Shift: Approach annuities as a potential source of guaranteed income, but ensure you understand the tax implications to make informed decisions.
Rental income is generally taxable, but you can deduct expenses. Active work income is taxed as ordinary income.
Mindset Shift: Consider real estate and part-time work as opportunities to enhance your retirement lifestyle rather than just additional income sources. They can keep you engaged and active.
Your health matters in retirement because it can change your income distribution strategy. Whether you are healthy and want to live an active lifestyle or face health challenges, managing your income properly is essential.
Mindset Shift: Instead of fearing the future, focus on what you can control today. Invest in your health and well-being, and plan your finances to support a fulfilling retirement.
A well-built retirement income distribution strategy isn't just about how much money you have; it's about how healthy you are and how you think about your retirement. By changing your mindset, you can approach retirement with optimism and confidence.
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