“How much money do I need to retire?”  

This seems to be the most common question that comes up in working with folks to develop a retirement plan. In order to determine that number, we first need to analyze our expenses and create a well-rounded, personalized retirement plan.

This will be a two-part series in which we will discuss the foundation of retirement expenses this week, and four more strategic aspects next week, to illustrate how to handle some of these concerns and maximize the effectiveness of your distribution plan. Here are the first 3 steps to develop a thoughtful income planning strategy:

Categorizing expenses

When you reach retirement, it can be helpful to break out your expenses in two different categories: needs and wants. The idea is to match up guaranteed income sources to provide an income stream that will take care of your fixed “needs”. This way, no matter what happens in the market, you know you have an income stream to allow for a place to live, be sure bills are paid, and provide a secure retirement. The remaining expenses, the “wants”, can be addressed through systematic withdrawals from traditional investments such as a standard stock and bond portfolio - such as an IRA or 401(k) - providing income as well as growth to keep up with inflation. You will still be subject to market risk, but with a combination of guaranteed income and systematic withdrawals, you can rest knowing you will not be kicked out of house and home from standard market volatility. During a downturn, you may have to take less extravagant vacations, but your “needs” will still be taken care of.

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Consider unexpected expenses

This can be the biggest curve ball in retirement and although we call them “unexpected” one should certainly plan to have these expenses come up as a near certainty. Unexpected expenses can include a number of issues from health care expenses to long term care costs and kids knocking at the front door to move back in. Although we do not know exactly what these costs will be, we do know they will come up and it is critical to plan for them. It is important to have flexible assets in retirement in order to be able to take significant lump sum distributions as needed for the unexpected. Another way to plan effectively for unexpected expenses is around the taxation (More to come on this next week)!

Incorporate Social Security strategies

It is critical to look at how different social security benefits will impact your other assets and financial plan as a whole. As we discussed the expense categories of needs vs. wants above, social security is a perfect example of a guaranteed income source (don’t laugh!) to match up with the needs. For some, the social security benefits may be enough to handle these lifestyle expenses, for others, we may need to shore up the difference still with other “guaranteed income sources” such as pensions, bond ladders, annuities, rental incomes, etc.

The last thing we want is to retire today only to find out a few years later we are forced to go back to work. I have seen this caused by unexpected expenses that came up where the only savings were in guaranteed income sources that didn’t allow for large distributions. I have also seen it caused by a significant market drop where the individual didn’t have any guaranteed income sources to lessen the impact of distributions, not leaving enough money left to maintain their lifestyle. Taking the time to explore and plan for your retirement expenses can be a great starting point to not only create a solid retirement distribution planning strategy, but it is imperative that you also develop a thoughtful strategy to maximize resources available to you for the success of your financial future.

Visit part two of this post covering four key income and tax strategies in retirement.

If you have questions about this article, or if we can be of service, be sure to get in touch with us!