Income Planning is Not Just “Investment Management”

Is income planning for retirement handled the same way as investment planning for future growth? In other words, should someone approaching retirement – and for our conversation retirement means the point when your investments will be needed to provide a significant portion of your income – manage their investments the same way as someone who is 35 years old?

In short, the answer is typically no.  Whereas the younger saver has more time for mistakes, the older person depending on her investments for income simply can not take the same risk to principal. In spite of the fact that there have been studies, including the fairly well-known Fidelity study which recommends that people taking money out of their retirement accounts take no more than 4% out per year to make it last, we have had too many large drawdowns (read: markets falling) to trust this approach in my opinion.

What’s the Risk with the Standard Asset Allocation Model?

The worst case scenario for an income-drawer is that the market drops right around the time a retiree starts withdrawing money. In this scenario, a retiree can run out of money much quicker than they planned. This is not an acceptable risk. Rather than managing a portfolio that bounces up and down exposed fully to risk, managing from a perspective of income planning for retirement takes a much different approach.

Introducing, Floor Plus Upside

You Want a Very Solid Floor!

Quite simply, inventory your mandatory expenses – the ones that can not be eliminated. The total is your floor income requirement. Next take your guaranteed income in retirement, such as expected social security and pensions, and add that up. Is it more than your floor expense total? Good then your floor expenses are met by your floor income, and you have the freedom to take more risk with your investments.

Is your floor expense total higher than your floor income? Then we need to secure a level of income, using your investments, to match your floor expenses before investing any of your funds aggressively. This is a different way to do things, but in my dealings with clients, this approach is much more tolerable for the risk wariness of the average retiree.

In other words, you can look at all the stats and charts you want about risk. But when the time comes for big swings in the market, will you be able to handle the large up and down swings of the market? if not, then you might want to consider the “floor plus upside” method of retirement income planning.

Read more about Floor Plus Upside in our Financial 101 Section Here:

Floor Plus Upside

If you’d like to discuss creating a personal floor plus income plan, feel free to call our office for a phone appointment or an office visit. Contact information is here:

Thanks for reading!