Floor & Upside Theory

The “Floor and Upside” Strategy of planning for retirement is a strategy espoused by Retirement Income Industry Association founder Francois Gadenne and it follows a very BASIC premise, but one that after seeing the worry in the faces of many middle Americans, makes a lot of sense:

First build a floor, and then create upside

What does this mean? It means that, before investing in any kind of risky portfolio, it makes sense to build a “floor” of safe cash flow streams for the retirement years. How?

First, define your baseline consumption, and then project what that will be during your retirement years. This gives us baseline income needed for retirement. Factor in any other guaranteed income sources you expect, such as social security and/or a pension. Determine how much additional money you will need above those guaranteed sources and use financial assets, like your 401k, IRA, or such, to secure a level of income that meets those basic needs.

To create a stable cash flow in the future, one could consider using government bonds that mature in the year needed, or for a higher return without the government guarantee, one could consider an annuity. Once this baseline is met, the planning can then focus on using residual assets for growth and possible lifestyle enhancement.

In my experience, I have found that this approach tends to give comfort to people when they know they can secure an income stream in some way or another. If you would like to learn more about this approach, call me at my office at 781.393.0021 or try a Quick Contact.

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