There are some welcome new thoughts and tools that make retirement planning more adaptable and explainable to your specific situation. Begin as DIY to understand your finances better and use your Advisor for the heavy lifting retirement analysis.
One of the most common questions I get asked in retirement planning is if your investment asset pool will last throughout your retirement time horizon. It’s a very good question and sometimes causes retirement anxiety if there is a reliance on your investable asset pool to provide a large portion of your monthly income. My philosophy is to cover as much of your expenses as possible with ‘guaranteed’ income streams that you can’t outlive. Social Security and a pension are good examples, but with pensions becoming more rare, there are a variety of ways to create the coveted Retirement Paycheck. We’ll get into those later in this article.
To help answer the question, “Will my retirement investments last throughout my retirement,” my best approach is to make sure a Retirement Income Plan is in place so that you can have a greater peace of mind. Then we can work on the investment plan for goals, other expenses, LTC, legacy plan, etc. I’ve written a separate article that covers Investment Planning.
There are a few basic steps to develop a Retirement Income Plan and each one can require quite a bit of detail. determine how much ‘guaranteed’ income is needed, which is highly dependent on your personal financial circumstances and desired lifestyle. There are generally three things that we need to address :
- Reflect on what you want to do in retirement. Who you want to become may be very different than the working-version of yourself.
- Will the retired-version of yourself require more, less, or different expenses? Estimate your monthly expenses, both essential and non-essential (discretionary).
- Is there an income/expense ‘gap’? What will your current, or projected, ‘guaranteed’ income stream cover?
- Resolve any income/expense ‘gap’ with an additional income stream or consider revising some of your goals.
Generally, as a Retirement Planner, I like to see a ‘guaranteed’ income stream that at least meets your monthly essential expenses. Better yet to meet all of your monthly expenses. Then use your investable assets to fund longer term goals, unforeseen expenses, potential Long-Term Care needs, and possible Legacy considerations.
It’s important to keep in mind that everyone has unique situation and circumstances that may lean toward different solutions. It is not a do-it-yourself type of Planning exercise as knowledge, experience, research, software tools, and human interpretation are critical components. However, there are some things you can DIY to get started as I’ll discuss throughout this article.
Following this general guideline and having an Income Plan to meet your retirement lifestyle goals may be just what you need to have a greater peace of mind. So let’s dive a little deeper!
Imagine your Purposeful RetirementTM
One thing I hear over and over again is how unfulfilled or disappointed people are in their retirement years. Others are super happy just to be not working at an unfilling job. Imagine what it could be like if you could construct a retirement lifestyle based on what truly makes you happy, giving back to the community, improved spiritual connection, or whatever your heart and mind can come up with. Everyone is unique, has unique skills, and untapped potential. You just need to find your untapped potential.
Most Advisors do not explore this very deeply. Traditionally, most of the emphasis in retirement planning is on the financial side. However, since 2015, I’ve seen enough wealthy retirees disappointed in their lifestyle that led me to create an additional planning step in helping clients create their own Purposeful RetirementTM.
This is largely a do-it-yourself exploration, but I do have a framework that may be helpful. The framework contains numerous questions for reflection and thoughtful responses. It’s a lot of work, but the reward could be enormous. There is no-charge for the framework. You can learn more by clicking the button:
Monthly Expenses
The next very important step that should be taken is knowing and managing your expenses. If you pursued the Purposeful RetirementTM framework, be sure to include any of those new expenses to help meet your new goals.
This part is also DIY. As a client, only you know what your spending requirements are. Some work needs to be done to think through your essential vs discretionary spending situation at retirement. Everyone is different. Some people have mortgages, others don’t. Some people have essential expenses that someone else might label as discretionary. The challenge here is to develop two spend categories: your essentials and your discretionary.
Some examples of essential expenses include, but not limited to are:
- Food (store bought)
- Housing
- Utilities
- Transportation
- Medical
- Legal
- Debt Payoff/Paydown
Other expenses can be categorized as non-essential or discretionary. Some examples may include eating out, subscriptions, entertainment, vacations, personal items and many more. The spreadsheet offered below can help distinguish and guide you in setting up both essential and discretionary expenses.
If essential expenses can be met by a ‘guaranteed’ income stream, you have created the foundation of a successful Retirement Plan that will enable you to sleep better at night, regardless of what the market does. In other words, you are “de-risking” a portion of your portfolio to provide a more stable income stream.
You can develop and track your monthly expenses in a software tool of your preference. If you don’t have access to one, I have an Excel spreadsheet that may help you. You can download it and use it as-is for no-charge.
Click this link to access:
After you download the spreadsheet, you’ll see that it does a bit more than categorize your essential expenses. You will see a section for discretionary expenses. There are plenty of categories where you can fill in your estimates and even add new categories of your choosing. All these get ‘rolled up’ to an overall spend, adding to your essential expenses. If you included your net income, you can see your over/under spend status.
You can also use it to track your monthly spend for each month of the year, if you desire to do so. Additionally, add your net income to see if you are above or below your net income level. That may be very useful information as it will be a red flag if you are over spending on a consistent basis. Please note, this tool is based on net income, not gross.
The Income/Spending ‘Gap’
Any income/spending gap needs to be addressed. The first step here is to know your ‘guaranteed’ income sources such as Social Security, pension, or other sources that can be relied upon. Subtract out any taxes or other withholdings and you have your net ‘guaranteed’ income.
Comparing the net income to your expenses it not typically hard, especially if you have a tool to help show if there is a gap. What may be hard is making some decisions if you have a shortfall. Typically, another set of eyeballs can help you see where some discretionary expenses may need to be cut. It can be an iterative process taking a few months to get your expenses under your income.
If your net income is greater than expenses, that is a good sign. But you still need to consider Goals and other unforeseen expenses, not to mention Long-Term Care (LTC) expenses for your Retirement Plan over-30 years. Those can only be modeled in a sophisticated retirement planning tool. Example goals may include a special/specific vacation, a child’s wedding, purchase of a new home, new car purchases, etc.
If a negative income/spending ‘gap’ still remains after tweeting down your expenses, it would be wise to seek out professional advice on if, when, and how to such ‘gap’ can be made up from your investable assets. This is not an easy analysis to DIY and generally requires professional assistance with advanced software tools to analyze your specific situation. This is what I refer to as the ‘Heavy Lifting’ required to “Visualize your Retirement Possibilities” or in other words to see the overall impact on a 30-year of your options over your retirement time horizon.
If you have any questions analyzing your income/spending ‘gap’, you can schedule a 30-minute no-charge walk through of your situation.
Establishing an Income Floor for Essential Expenses
As a general practice, I ask clients to cover at least the Essential Expenses with their ‘guaranteed’ income stream. This is called establishing an Income Floor. In other words, your ‘guaranteed’ income can’t go any lower.
Establishing an Income Floor Strategy is a good idea if you are reluctant or don’t have the means to manage an asset pool withdrawal strategy to provide for your monthly expenses. The ‘guaranteed’ income might consist of Social Security, pensions, annuities, or combinations of those. It’s not uncommon to have multiple ‘guaranteed’ income streams to meet monthly essential expenses and then manage your non-essentials and wish list expenses with income derived from your investment pool.
An ideal case would be when the ‘guaranteed’ income stream(s) can meet all monthly expenses, both essential and discretionary. Here is an example of where income falls short of monthly expenses…
Example of Income Floor providing $5,000 in Essential Expenses
This example shows a total of $7,500 in expenses. $5,000 are essential. There are 3 income streams (shown as different shades of green) that provide the $5,000 per month in income required. The remaining $2,500 in expenses would be subject to a withdrawal from the existing asset pool.
Depending on your individual circumstances, you might get antsy with a $2,500 income gap, especially if you’re not comfortable managing a withdrawal strategy from your asset pool.
The Heavy Lifting: Evaluating Financial Strategies to Eliminate the Gap
If you’ve embarked on using the Excel spreadsheet, you have a very good tool to DIY your expenses and compare to net income. You are off to a good start in understanding your current situation. By looking at your income/expense gap, if one exists, it’s time to explore how you will make up the gap.
Now is the time for the “Heavy Lifting.” Retirement Planning is very sophisticated analyses and requires the experience and knowledge that only a qualified professional financial possesses. Discuss your current situation with your current Advisor. If they don’t have the ability to provide a Retirement Income Plan, run various 30-year projections, then start looking for a 2nd opinion. Retirement Planning is much more than an investment strategy to accumulate wealth. It’s about a de-accumulation (distribution) strategy to spend down your wealth wisely so that you don’t run out of money during your retirement time horizon.
Financial Modeling
The “heavy-lifting” begins with the financial modeling your goals, unforeseen expenses, LTC with different retirement scenarios such as when you want to retire, when you begin taking Social Security, turn on other income streams, and end debt payments.
Once all of that has been modeled into a retirement planning tool, then long-term projections can be made on when you may run out of money. Multiple scenarios can be evaluated such as adding and removing Goals, when to claim Social Security, analyzing different ways to pay for LTC. All those scenarios may be analyzed and compared for the most beneficial personal situation.
If you have a spending gap where expenses are greater than net income, then some analysis work needs to be done to determine if an additional ‘retirement paycheck’ can be created from the investable asset pool to make up the spending gap. There are a variety of ways to do that and discussed at a high level below under Retirement Paycheck.
Generate Income from an Asset Pool
If your current ‘guaranteed’ income stream does not meet all the basic expenses and goals, it becomes a question of what income stream can be generated from your asset pool. There are several ways to de-accumulate your asset pool to generate income during retirement. I’ll discuss just a couple common ones in this article:
- Withdrawal using the 4% Rule
- Dividend Investing
- Purchasing an annuity product
- Bucket Strategy
There may be other strategies depending on your individual circumstances, but these are the major ones that I typically analyze for a client.
It is not the intention of this article to dive into any of these, as the approach is highly client-specific circumstances. There are pros and cons of each depending on those circumstances.
Please note: The financial analysis used to determine financial strategie(s) used throughout your retirement time horizon is a whole different animal than evaluating your income and expenses in a spreadsheet. This is not a DIY type of assessment. Many people look to their circle of friends for advice. Please be aware, if you receive advice from your brother-in-law, neighbor, or even trusted friend, it’s important to know their situation is probably very different than yours. You’ve worked too hard to accumulate what you have. You have 30+ years to spend it down wisely so that you don’t run out of money. This is not the time to take that risk. What works for your trusted friend, may not be in your best interest.
When you are ready, you can go to Start My Plan to begin the retirement planning process.
Retirement Paycheck
What is a Retirement Paycheck? Your Retirement Paycheck is the summation of your income streams that you can count on month after month from the time you retire until the day you pass away.
The goal of the Retirement Income Planning process is to end up with a Retirement Paycheck that works for you.
As you go through the retirement planning process with a financial professional, take the time to review various scenarios, visualize the possibilities, and create the best possible retirement paycheck for your personal situation.
The end result of the financial analysis is you should be able to Visualize Your Retirement Possibilities and have a Retirement Income Plan that can at least meet your Essential Expenses
Conclusion
The most important concept in this article is distinguishing wealth accumulation (pre-retirement) to wealth distribution (in retirement), The simple comparison is that wealth accumulation sets your retirement stage, while wealth distribution ensures a sustainable retirement income.
Developing your Purposeful RetirementTM can be a great way to envision what you want your retirement to look like.
Also, monthly expenses, both essential and discretionary, can be set up using the Microsoft Excel spreadsheet. This is a good first step to understanding the financial requirements to meeting your vision.
When you are ready for running projections, comparing scenarios, and in need of tax planning, contact us for the heavy lifting…
How We Can Help
There are literally dozens of areas we can help with. As we mention throughout this article and our website, Income Planning, Tax Planning, and Investment Planning are the 3 key pillars to our 7 Pillars Retirement Planning® approach. Not to mention Health, Long-Term Care, Risk Mitigation, and Estate Planning rounding out the 7 pillars you should be preparing for a comprehensive retirement plan.
Our primary objective is to help you formulate a Plan that will provide you the income to last you throughout your retirement horizon.
With my expertise and industry software tools, together we can “Help You Visualize Your Retirement Possibilities.”
Mike Kastler
I have been performing financial planning and retirement planning since 2015 with a Master of Science in Finance and the prestigious designation Retirement Income Certified Professional®. As an Fee-Only, Fiduciary, I do not sell commissionable products and only provide Assets Under Management (AUM) services as a flat-fee service, not a % of AUM.
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