The Retirement Income Process
Do you want a reliable retirement income stream over the duration of your retirement?
The Retirement Income Process provides the framework.
The debate over the best way to create retirement income has been raging for years. In addition to meeting your early retirement income needs, smart retirement income planning must address the following unknowns:
How long will you need income for?
How will your unplanned spending change: unplanned spending and inflation.
Will health care costs continue to grow significantly faster than inflation?
Beyond stocks, bonds, taxation, and even comprehensive retirement planning, the multitude of income strategies is understandably confusing. Further, some are merely rules of thumb with significant assumptions that likely do not apply to you or your plans!
What should my portfolio allocation be at retirement?
Should I buy an annuity to guarantee a portion of my income?
Should my portfolio include higher yielding bonds or only use higher quality bonds?
Should I used a fixed allocation during retirement or can I get more conservative over time?
Should I take Social Security early to keep my assets invested or delay taking my benefit?
Subsequently, I’m here to explain how The Retirement Income Process works. The entire process fit’s on one slide but scroll down and as I’ve described each section individually.
First, let’s address Social Security – the discussion around when and how to use Social Security and Pensions should first occur during initial retirement planning and, once again, during the transition into retirement. A number of factors to consider here (longevity, tax planning/Roth Conversions, etc…) but we’ll leave this topic for another post.
Next is Your Retirement Reservoir – this is a portfolio custom designed (based on you and your retirement plan) to provide growth and income throughout your retirement. You won’t spend all of the Investment Income (dividends and interest income) that’s available as some will be reinvested back into Your Retirement Reservoir on a yearly basis. Your Retirement Reservoir contains both longer term/growth oriented and more conservative/volatility reducing/income focused investments. This portfolio is adjusted in the context of your plan, the markets and as your retirement evolves.
Finally, Your Income Reserves:
Your Income Reserves are custom sized to complement your Social Security(and pension if you have one) and Investment Income. Your Income Reserves contain stable, income-focused investments and, generally, we will refill the “spent” reserve at the end of each “positive” year. But this isn’t done without consideration. For example, in “positive” market years, such as 2017 & 2019, we refill the empty Income Reserve at the end of the year to ensure we have 5 full years of retirement spending “runway”.
In contrast, we would not rebalance in a “negative” year like 2018 when, generally speaking, the invest portfolios were down. The key benefit of having Five (5) Income Reserves is the ability to “ride out” significant economic events for at least 5 years, such as the Technology Bubble in 2001-2003, the Financial Crisis of 2007-2011 or the Coronavirus Pandemic of 2020-202X. (Need more “insurance”? The Retirement Reservoir contains additional conservative investments that can be accessed easily as needed.)
Combining these three income streams can create steady, reliable and consistent income throughout your retirement.
Please Note: Speak to your tax, legal or financial advisor for specific advice about your particular plans and situation.
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