A retirement income plan is used to help you prepare to retire. Its goal is to give you confidence as you transition from working income to retirement income. Once you’re retired, it can also guide day-to-day and major decisions.
Retirement income planning can be much like baking a cake. If you leave out essential ingredients, it’s likely it won’t turn out right or could even lead to disaster.
Here are the 7 essential components of a retirement income plan:
- Know how much retirement income you need
- Identify your guaranteed income sources and amounts
- Determine your retirement income gap
- Turn your investments into cash flow
- Keep your assets growing to keep up with inflation
- Have a plan for emergencies, vacations, and dream experiences
- Be flexible and make regular adjustments
#1 – Know how much retirement income you’ll need and when
It’s impossible to determine the amount of income you’ll need if you don’t understand how much you’ll spend and when you’ll retire. To do that you’ll need to decide the best date to retire and then project your expenses during retirement.
Deciding when to retire can be a big and emotional decision. Consider all your various income sources, how much you’ve saved, your health, and the degree to which you enjoy your career. Unfortunately, there isn’t one answer for everyone when it comes to when to retire.
As you determine the amount of retirement income you’ll need, review categories such as housing, food, transportation, health care, insurance, charitable contributions, debt servicing, entertainment, and vacations, if possible. This number shouldn’t be just about surviving but creating a retirement lifestyle that is meaningful and rewarding.
#2 – Identify your guaranteed income sources and amounts
Guaranteed income consists of sources that will deposit cash in your bank account on a monthly or annual basis. It’s money you can count on, each and every year. Social Security, pensions, and annuities can all be sources of guaranteed income.
Take a look at each source of guaranteed income available to you and analyze the best strategies to maximize the benefit. Often, decisions can’t be reversed on guaranteed income so make sure you’re well-informed and have weighed various options. Also think through how one source of guaranteed income will impact other areas of your income plan. Consider talking with a financial advisor about your specific situation, as each income plan is unique.
#3 – Determine your retirement income gap
Once you know when you’ll retire, add up all the sources of your guaranteed income. Is this more or less than what you’ll need? If you’re like most families, you’ll need more income than your guaranteed sources provide. We call this your income gap. Once you know your income gap, you and your financial advisor can address this deficiency.
#4 – Turn your investments into cash flow
In order to fill your income gap, you’ll most likely need to turn your investments into cash flow. To do this effectively, separate your investments into three different buckets: short-term, mid-term, and long-term.
With this strategy, during retirement you’ll spend money from the short-term bucket, grow money conservatively in the mid-term bucket, and then grow money you won’t need for ten or more years in the long-term bucket. As you deplete money from the short-term bucket for cash flow, use your mid-term bucket to replenish it.
As you create income, it’s also wise to consider the tax status of your various investments. While it is often a good idea to spend taxable income first, then tax-deferred, and then tax-free, each situation is unique, and at Advanced Retirement Strategies we would recommend discussing your situation with a knowledgeable financial professional.
#5 – Keep your assets growing to keep up with inflation
Due to concerns over market volatility and potential loss of capital, investors can make the mistake of putting all of their investments into extremely conservative investments (e.g. bank accounts earning very little interest) that don’t outpace inflation, which leads to less purchasing power over time.
While conservative investing is an essential component of an income plan, be strategic about the vehicles you use. Better conservative investments are available that allow families to keep up with inflation, while still protecting against downside risk.
#6 – Have a plan for emergencies, vacations, and dream experiences
Another essential element of a retirement income plan is to anticipate emergencies and unforeseen events. Life is rarely predictable and building flexibility into your plan to address immediate needs for additional income is vital.
Your plan should allow for big purchases such as new cars, dream vacations, and amazing experiences with children and grandchildren as well. Often, vacations and memorable trips occur in the first decade of retirement, often called the go-go years, as health and optimism are at their prime. Before long, however, retirees will transition into the slow-go years, and eventually the no-go years. A good and well-thought-out income plan can help you make the most of your prime retirement years.
A retirement income plan can also give you the financial confidence to spend retirement money without the excessive worry of running out of money. We know that life isn’t all about money, but money enables people to have amazing experiences during retirement.
#7 – Be flexible and make regular adjustments
As you develop and then implement a retirement income plan, on your own or with the help of a financial team like ours, it’s essential to build flexibility into the overall plan. If you pull too much money out one year, you may need to adjust. Opposingly, if the market does extremely well one year, a retirement income plan can give you the confidence to buy a new truck or take that dream vacation.
At Advanced Retirement Strategies, when we work with clients, we review and adapt their income plan every six months. Life will definitely throw you curveballs, but regular adjustments can help you stay on target. We typically meet with clients semi-annually to review and make modifications. Having a team to regularly assist you in making critical financial decisions can give you peace of mind and potentially much better results.
Creating a robust retirement income plan that includes all the essential components can be critical to your confidence and quality of life both before and during retirement. Begin by determining when to retire, how much income you’ll need, and then analyze your guaranteed sources of income. Next, you’ll want to decide if an income gap exists and create a plan to fill that gap with income from your investments. Finally, remember to continue to grow your assets, make plans for emergencies and fun, and make regular adjustments.
Our team at Advanced Retirement Strategies specializes in helping diligent savers in Utah with $250,000 or more of investment and retirement assets (not counting your primary residence) prepare for and then transition into retirement. We would love the opportunity to assist you. Just go to the get started page and set up a free 15-minute quick consult.