INCOME PLANNING – Whether you are in, nearing, or decades away from retirement, you face an increasingly complex challenge – planning for income to last throughout your lifetime.  You are not alone.  More than 35 million Americans are currently over age 65 right now¹.  The first wave of baby boomers has just begun to hit the shores of retirement, and right behind them are millions more.  A  major concern is will I outlive my income, or will it outlive me.  Our goal is to utilize today's financial planning advice to meet your need for adequate retirement income.

The accumulation stage and the income stage tend to be opposites, and a completely different approach must be taken when creating a retirement income plan.  Income, not accumulation, becomes the focus.  We work to help create consistent, achievable, and reliable income streams for our retiree clients.  We strive to help our income planning clients approach retirement with a feeling of confidence.  Planning for retirement is much different today than it was for previous generations.  Retirement income increasingly depends on personal savings and investment.  Gone are the days of company pensions, personal savings may now need to account for almost 60% of one's retirement income.  Social Security currently provides only 20% of retirement income for households with incomes of $40,982 or more per year²Asset management is increasingly complex and investors confidence in their ability to make good decisions is flagging.  The days may be gone when you simply moved all your savings to bonds and cash when you retire and live off the interest.  Life span is increasing.  Spending 30 to 40 years in retirement may be a realistic possibility.

There are positive factors at work today as well, financial planning factors that can be pivotal in laying out a new approach to retirement planning.  This is the first generation that will retire with an array of tax deferred retirement savings vehicles like IRA's 401(k)'s, 403(b)'s and other defined contribution plans.  IRS regulations that enhance the efficacy of these plans in building and managing retirement assets:  catch-up contribution limits, greater rollover flexibility, and more advantageous distribution options.  Investment products that make it easier to assemble a diversified portfolio to mitigate market risk:  mutual funds in greater variety of specialized asset areas, plus the introduction of asset allocation mutual funds. These new offerings, combined with knowledgeable and experienced investment advisors can help develop a comprehensive retirement income plan.  

Putting together an income planning strategy is not something to be done piecemeal.  It takes all of the financial planning elements working together to build a realistic plan.  The intricacy of coordinating social security benefits, IRA's, company retirement plans,etc. can be a daunting task that may require the help of a qualified advisor.  Our retirement income plan begins by developing a composite picture of your envisioned post-carrier lifestyle, estimated essential and discretionary expenses and an inventory of current and potential financial resources.  Before integrating this snapshot into a road map to financial security we help our clients understand and integrate five central factors that may put their retirement plan at risk in reaching their retirement income goals.  CLICK HERE  

Longevity – Successful retirement income planning is predicated on estimating how long you are going to live.  Based on actuarial tables, half the population will outlive their life expectancy.  This means they will outlive the number of years they will be living in retirement, a miscalculation that increases the likelihood that they will run out of savings.    A more realistic approach is to plan for longevity.  For example, a 65 year old American man in good health has a 50% chance of living to 85 and a 25% chance of living to 94.  Based on these findings, you'll want to consider planning for income into your 90's.  This means 30 plus years of post retirement income for many retirees.  

Inflation – Inflation is the long-term tendency of money to lose purchasing power.  It increases the future costs of goods and services, and potentially erodes the value of assets set aside to meet those costs.  For example, the gallon of milk costing 65 cents in 1970 costs $3 today.  Even a relatively low inflation rate of 2% can have drastic impact on purchasing power over 30 years.  The strong likelihood of ongoing inflation makes it imperative that your retirement savings include investments with the potential to outperform inflation, especially when you consider the longevity of retirement discussed earlier.

Investment Asset Allocation -  Risk is inherent in any investing.  Whether it be purchasing power risk or interest rate risk of investing in fixed income, or business risk, market risk, or international risk involved in equity investing.  As we've just discussed the ability to outperform inflation needs to be addressed in a retirement income plan.  Although we can't control market behavior, we may be able to better manage the long-term effects of market behavior through our investment choices.  Asset allocation, the balance between differing asset classes, is one tool that we use to manage market behavior.  A significant imbalance between stocks and bonds may impose a risk.  Too aggressive a portfolio can increase your vulnerability to market volatility.  Too conservative a portfolio may not outpace inflation, thereby increasing the risk of outliving your assets.

Especially in retirement, the key to long-term success can lie in a balanced asset portfolio.  Reducing portfolio volatility is of great importance when you withdraw money as part of a retirement income plan.  As a portfolio's propensity for volatility increases, the length of time the portfolio may survive in a down market decreases.  The more moderate portfolios appear to strike a balance between preserving capital during down markets and providing potential for continued growth during retirement.

Excess Withdrawal – Even diversified asset allocation strategies don't always protect from down cycles in the market, making it equally important to establish a wise withdrawal strategy from your retirement assets.  The withdrawal rate you decide on can dramatically shorten or lengthen the productive life of your assets.  This is a variable that's largely in your control.

The bear market of 2001-2002 exposed the fallacy of overly optimistic withdrawal rates of 7%, 8% or more per year.  The belief then was that retirees could count on rising stock prices to keep the value of their investments unchanged while they withdrew large amounts of their portfolio annually.  Analyzing historical data, and not merely recent events, points out that withdrawal rates much higher than 4% begin to increase the likelihood that you will deplete your assets prematurely.  A comprehensive retirement income plan helps to identify the withdrawal rate that provides confidence in your income outliving you.

Health Care Expenses – Longer life spans, rising medical costs, declining retiree medical coverage by private employers, and possible shortfalls ahead for Medicare and Medicaid all add up to make health care expenses a critical challenge for retirees and pre-retirees alike.  Estimates show that today's retirees may need upwards of $200,000 to supplement Medicare and cover out-of-pocket health care expenses in retirement⁴.  This estimate is in addition to any potential long-term care needs, which can range from $35,000 in the Southwest to over $114,000 in the Northeast for one year of care.  Roughly 50% of Americans now turning 65 will be admitted to a nursing home at some point in their lives.  Half of them will stay six months or less, but about 1 in 10 will stay three years or more³.

Rising health care costs coupled with inadequate health care coverage can have a devastating impact on your retirement income plan.  

Start planning for retirement now.  Envision the retirement lifestyle you want.  Identify your retirement expenses, and analyze the essential and the discretionary.  Review the income, accounts, and other assets available to you to fund your retirement.  Compare expenses to income.  Allocate your investments appropriately for your time frame, your willingness to take risk, and your overall financial situation.  Make sure that your portfolio is set up to help minimized any foreseeable or likely risks.  Monitor your plan regularly.  An out of date or unrealistic plan is of little practical use in achieving lasting income.  Like a good road map, a well-thought-out retirement strategy should give you comfort and provide you with the confidence of knowing you are headed in the right direction.  Evans Financial Partners is able to help you with your personal retirement income planning needs.

2.  Social Security Administration, office of Policy, Income of the Aged Chartbook, 2002.  Issued September 2004.  For illustrative purpose only.


3. Farrell Dolan and Van Harlow, “Lifetime Income Planning,” FMR Corp., 2006