When it comes to income planning and retirement tax strategies, most people believe it revolves around one simple fact: having enough assets through other means to sustain yourself after retiring from your job. These “means” may involve real estate ventures, being a silent partner in a business, or investments.
Yet when attending a retirement income planning workshop, you may be surprised on just how complex income planning really is. While income planning does focus on financial cash flow, it also focuses on your amount of risk tolerance, changing expenses at different age intervals, portfolio allocations, income sustainability, and a range of other factors. It’s one of the reasons why so many people register to attend a free pre-retirement financial planning workshop offered by Fortified Retirement.
Every person has differing expectations in retirement. What you consider in regards to how much money you will need in retirement, what you plan to do with your lifestyle, and where the income will come from, will be different from another person’s financial standing and viewpoint. So it is important to get retirement planning advice tailored to your particular needs. While there are numerous income approaches, here are three main strategies to consider.
Income/Expense Segmentation (Bucket Approach)
It’s been found that people will spend more money during their first years of their retirement and less as they grow older. The Income/Expense Segmentation approach is focused on separating your income and expenses into specific categories, called “buckets,” and then allocating the right amount of assets into separate portfolios to cover each category. For example:
- During age 50-60: Money is set aside for short-term goals to cover vacation expenses and other temporary activities
- During age 60-70: Assets and investment income for more intermediate goals, such as increased medical expenses or downsizing to a smaller home.
- During age 70+: Longer term investments for the uncertain future while having enough money to cover all living expenses
Each bucket will have different investment options based on earnings and spending habits, allowing you to diversify each portfolio. So the first bucket may have more money markets and CDs while the second and third bucket will focus on stocks and bonds. You can also have more buckets than just those three. But this is a good starting point when getting involved in retirement planning seminars.
Total Return Approach
Separating all your income and spending into multiple portfolios may not be applicable to your financial preferences. You may wish to just have one portfolio for all of your retirement income that you can dip into to cover your changing expenses. The Total Return Approach allows you to manage your entire portfolio all at once, and then a set amount of money is withdrawn from the account each month to cover all expenses.
This approach is ideal for people who like to feel as if they are still getting paid a steady paycheck each month. The portfolio is still diversified as it uses all of your returns of dividends, capital gains, interest and principals for your income stream instead of specific returns used toward specific expenses.
When deciding on withdrawals, the common rate is usually 4%. Yet this percentage shouldn’t be set in stone as you may be dealing with more or less expenses. The percentage should also reflect the current economic landscape. For each year, the percentage will also increase to keep up with inflation. Attending a free retirement income planning seminar can allow you to figure out the withdraw percentage that focuses on your particular financial circumstances and portfolio returns.
Essential/Discretionary (Floor and Upside) Approach
In this approach, your investment portfolio is divided into two categories: essential retirement spending and discretionary spending. You have all your basic reoccurring expenses as essentials, such as food, mortgage/housing, and clothing. Then you have all your discretionary, occasional spending such as vacations, gifts, entertainment and recreational activities into the other category.
You build your portfolio investments to cover each category. Guaranteed, reliable income should go to your essential expenses. So you would place social security, pensions, fixed annuities, CD ladders and bonds toward this spending as that becomes the “floor or foundation” of your retirement income. The other portion of your portfolio can be a mixture of higher risk investments that will go to your discretionary spending.
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There are upsides and downsides to each income approach. Whichever strategy you pick, you should always start out your income planning by defining all your current and future expenses as well as viable income streams. This strategy allows you to have a clearer picture of your financial situation. If you are ready to take that next step toward income planning, register for Fortified Retirement’s retirement financial planning seminar and workshop.
Licensed Insurance Professional. Provides general information about insurance and retirement-related products and services. These products and services may not be specific to a particular state. Information provided on this website, in seminars or through printed or other published materials are not intended as specific legal, accounting or investment advice to an individual’s particular situation. By providing your information to us, you agree that we may contact you regarding the potential sale of annuity and/or insurance products. Information provided by Licensed Insurance Professional does not necessarily represent that of the individual professionals presenting this information. All the information presented is believed to be accurate and is secured from reliable resources, however, no guarantee is made to the completeness or accuracy of the information presented. Any opinions expressed are those of the author and the material presented is for educational and informational purposes only and is not intended as legal, investment or tax-related advice.
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