Principles for Retirement Income Planning
Thirty-five years of planning folk’s retirements has taught me the vast majority of people do their planning last minute solely to gauge the adequacy of long-term funding; rarely is due consideration given to the many strategic income options available, or the need for a tax smart income plan, one that doesn’t disrupt established investment or estate plans. This makes me think of the mountaineer who trains exclusively in the gym, who has the strength and endurance required for the climb but lacks the technical mountaineering experience to pull it off. It’s not ‘if’ something will go wrong in the mountains, it’s whether one will know what to do ‘when’ something goes wrong. In light of that commonality, let’s consider the guiding principles requisite to effectively mapping a retirement income:
Maintain a comprehensive budget which differentiates fixed and voluntary expenses. Map both expense assumptions in your plan and observe the impact voluntary expenses will have on your retirement.
Use fixed income sources, like Social Security, defined benefit pensions, and lifetime income annuities, to fund fixed expenses. Peace of mind may accompany the knowledge one will cover the other.
Use fluctuating income sources to fight inflation with compounding dividends and growth, and to fund voluntary expenses. We reside in an inflationary culture; to avoid being eaten alive by inflation we must appropriate a portion of our capital to holdings that generally appreciate in an inflationary environment, like real estate, stocks, and other real assets. That said, it is essential to manage risk with these holdings.¹
Diversify income sources based on need. Applying specific income sources to specific expense types has several benefits. Income which matches the nature, duration, and amount of certain expenses increases continuity in the overall plan. It also applies the financial principle of diversification to one’s retirement income sources, always a prudent maneuver. Finally, it helps avoid disrupting established investment and estate plans, since income streams are not few and inflexible. It takes many technical tools to safely ascend a glaciated mountain!
Project growth rates on risk-holdings conservatively in your planning, and embrace the withdrawal strategy for those assets that is most complimentary to, and consistent with your customized retirement plan (see Guiding Withdrawal Strategies to Avoid Capital Depletion).
Map your retirement income from these various sources with a combination that will keep you in the lowest average tax bracket throughout the duration of your retirement. Understand this requires planning; the lowest bracket today might result in tax abuse later.
The safest way to survive a big mountain expedition is to be on an accomplished team led by experienced guides. Ask your financial advisor to work with your CPA and Esquire to create a smart income plan, and then studiously apply it.
Think about it, Shaun.
“In abundance of counselors there is victory” ~Proverbs 24:6
1 Smart Asset, “How to Create Your Own Retirement Income Plan”, Written by Eric Reed, December 3, 2023
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not reflect the views of LPL Financial.
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There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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