Retirement income planning in Arizona: savings to paycheck

Retirement income planning means deciding where each month's income will come from once the paychecks stop, and making sure it lasts as long as you do. Most Arizona retirees draw on some mix of Social Security, a pension, savings and investments, and sometimes an annuity for guaranteed income. The big decisions are when to claim Social Security (as early as 62, with full retirement age 67 for anyone born in 1960 or later), how to withdraw from savings in a tax-smart order, how to cover required minimum distributions that start at 73, and how to plan for health and long-term care costs. This guide is education, not investment advice.

Start with your income floor

A useful first step is to separate your spending into two buckets. Essential spending covers housing, food, utilities, insurance premiums and health costs. Flexible spending covers travel, gifts and hobbies.

Many planners suggest covering essential spending with income that keeps coming no matter what the markets do, such as Social Security, a pension or an annuity that pays for life. Flexible spending can then come from savings and investments, which you can adjust in a bad year. Our retirement income gap calculator helps you see the difference between the two.

Start with real numbers. Pull your last twelve months of bank and card statements and sort them into essential and flexible spending. Most people find a few surprises, in both directions, and the plan gets much easier once the numbers are honest.

When to claim Social Security

According to the Social Security Administration, you can start retirement benefits as early as 62, but the monthly amount is permanently reduced. For anyone born in 1960 or later, full retirement age is 67, and claiming at 62 means a benefit about 30% lower than at full retirement age. If you wait past full retirement age, your benefit grows with delayed retirement credits until age 70.

For married couples, the claiming decision is a joint one. When one spouse dies, the surviving spouse keeps the larger of the two benefits. That is why many couples have the higher earner wait longer to claim, so the survivor benefit is larger for whoever lives longest.

• Claiming early can make sense if your health or finances call for it.
• Waiting can raise lifetime income, and for married couples it can raise the survivor benefit.
• Your my Social Security account at SSA.gov shows your personal estimates at each age.

Required minimum distributions

If you have a traditional IRA, 401(k) or similar tax-deferred account, the IRS requires you to start taking money out once you reach a certain age. Under current law that age is 73. The IRS lets you delay your first required minimum distribution until April 1 of the following year, but then you take two in the same year, which can push up your taxable income.

Those withdrawals count as income, which can affect how much of your Social Security is taxed and, once you are on Medicare, whether you pay a higher Part B and Part D premium through IRMAA. Planning withdrawals in the years before 73 can smooth this out.

Under the SECURE 2.0 Act, the starting age is scheduled to rise again to 75 for people born in 1960 or later, beginning in 2033. Check the IRS rules for your birth year before you plan.

The four risks a retirement plan has to handle

No single product handles all four. A plan usually combines guaranteed income, savings you can reach in an emergency, and insurance for the risks you cannot afford to carry yourself.

Review the plan at least once a year and whenever something big changes.

• Longevity: running out of money because you live longer than planned. Income that lasts for life is the direct answer.
• Inflation: prices rising faster than your income. Social Security has cost-of-living adjustments; most fixed income does not.
• Market timing: a big loss in the first years of retirement, while you are withdrawing, can do lasting damage.
• Health and care costs: Medicare does not cover everything, and it does not pay for long-term custodial care.

Where annuities can fit

An annuity is a contract with an insurance company. In return for a lump sum or a series of payments, the insurer agrees to pay you income now or later, and some annuities can pay for the rest of your life. That makes them one way to build the income floor described above.

Annuities also have trade-offs: surrender charges if you take out too much too soon, less access to your money, and guarantees that depend on the issuing insurer’s claims paying ability. Our annuities guide explains the types in plain English.

Before you consider any annuity, make sure you have an emergency fund outside of it and a clear picture of your spending. An annuity should solve a specific problem in your plan, such as covering essential expenses for life, rather than be the plan itself.

Health care is a retirement expense

If you retire before 65, you need coverage until Medicare starts. Our retiring before 65 guide covers the options and how your retirement income affects Marketplace tax credits.

At 65, Medicare becomes your main coverage, and you still have premiums, deductibles and prescription costs to plan for. Long-term care is the expense most plans leave out entirely. Viola is Certified in Long-Term Care, and she builds that conversation into retirement planning from the start.

A simple planning checklist

• List every income source and when it starts.
• Add up essential and flexible spending separately.
• Check your Social Security estimates at 62, 67 and 70.
• Note the year you turn 73 and plan withdrawals before then.
• Decide how you will cover health insurance before and after 65.
• Decide how you would pay for long-term care.
• Review beneficiaries on every account and policy.

Arizona factors to build in

Arizona is a popular place to retire, and some of its features matter for your plan. Arizona does not tax Social Security benefits. Other retirement income, such as withdrawals from traditional IRAs and 401(k)s, is generally subject to Arizona income tax, so ask your tax professional how your mix of income would be taxed.

Many East Valley retirees also split the year between Arizona and another state. That affects which Medicare plans work for you, whether a provider network travels with you, and which state you claim as home for tax purposes. Build that into the plan early rather than discovering it in your first summer away.

---

The bottom line

Retirement goes better when the income plan and the insurance plan are built together. Visit our Annuities and Retirement Income page, come to one of our seminars, or book time with Viola. She will help you see where guaranteed income, Medicare and long-term care fit, and she will tell you plainly when a question belongs with your tax professional or financial advisor.