Episode #83: Does Your Retirement Income Strategy Reflect Your Income Needs?


There are many challenges to consider when it comes to planning for your retirement. Longevity, inflation and stock market volatility are just a few of the factors that can affect your future income.

In this episode of Money Script Monday, Sean presents four steps to determine if your current retirement approach is helping you to achieve your long-term financial goals.


 

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Video transcription

Hello, and welcome to another edition of Money Script Monday.

My name is Sean Brady and today's topic is, Does your retirement income strategy reflect your income needs?

Retirement in America is changing and so are the financial risks.

Building your retirement income strategy requires you to really take a look, a realistic look, at your retirement goals and the income that's going to be needed to sustain your lifestyle.

That's why it's more important than ever to really consider these challenges and how they're going to affect your future income.

That's challenges like longevity. Compared to generations past were certainly living longer and healthier lives into retirement. 25 or 30 years, maybe even more.

So, you're going to need an income that's going to last just as long, if not longer.

Things like inflation. Historically the average rate of inflation is about 1.76% according to the Department of Labor Consumer Price Index.

Over a longer retirement, that can significantly reduce your purchasing power.

Market volatility, another challenge, equities, such as stocks, have historically helped retirees keep pace with inflation but as we all know, the market is unpredictable, and your future income really shouldn't be.

That's why it's really important for you to take a look at these four steps behind me to kind of ensure that your income lasts throughout your entire retirement.

Step 1: Estimate Expenses and Income Needs

That brings me to step number one. Estimate expenses and income needs.

step 1 estimate expenses and income needs

In developing your retirement income strategy, it's really important that you have a clear understanding of your expenses throughout retirement.

Creating an expense list like this, can really help you identify your income needs, by categorizing your expenses into these three categories.

  • Essential: food, mortgage, transportation, taxes
  • Discretionary: entertainment, travel, major purchases
  • Unexpected: major healthcare needs, personal emergencies, etc.

To ensure that your essential needs or expenses are taken care of first, start from the top of the list and then just work your way down.

Step 2: Determine How to Pay for Each Expense

Step number two, determine how to pay for each expense.

Once you've identified what your expenses are in retirement, you're going to need to identify your income sources and how those income sources are going to fund each of these expense categories.

step 2 determine how to pay for each expense

The important thing to do is start with your guaranteed income sources.

That's things like social security, pensions, annuities. And those are great to fund your essential expenses throughout retirement because they provide you predictable income.

Investable assets, these are great to fund your discretionary and expected expenses. And that's because these expenses are a little bit more flexible, generally speaking, they're your essential expenses.

You could also use your investable assets to purchase a portion of other financial products.

Step 3: Identify If More Income is Needed

Now, once you've determined what your retirement expenses are, you've determined what your income sources are, and how they're going to fund each category, you may find yourself in a situation where your essential expenses exceed your guaranteed income sources.

step 3 identify if more income is needed

If that is the case, then you're really lacking in adequate amount of predictable income to take care of those basic day to day expenses throughout retirement.

And if that's the case, you may find yourself in a similar example here, where you calculate your essential expenses and let's say they come out to $40,000.

Then you calculate what your guaranteed income sources are going to be and that ends up being $30,000.

You're really going to end up with a shortfall, missing about $10,000 every single year of predictable income that could take care of those essential expenses.

Step 4: Supplement Retirement Income Strategy

That really leads me to step number four. Supplement retirement income strategy.

So, once you've determined that there is a shortfall and you are in need of some guaranteed income, don't worry, it's not too late.

step 4 supplement retirement income strategy

You should just really contact your financial professional.

You and that person could get together and review your current assets and then you can decide and determine whether a portion of your assets could be repositioned to another product that can guarantee income and take care of that shortfall you have in terms of your essential expenses.

One such option is to convert a portion of your assets into annuity.

An annuity is designed to take care of those long-term needs for retirement income by providing tax deferral, a death benefit during the accumulation phase, and a guaranteed income stream for life.

Contact your financial professional today to see if an annuity is appropriate for you.

Thank you, and we'll see you again next time on Money Script Monday.

About Sean Brady

Sean Brady is an Advanced Case Designer at LifePro. He works with financial professionals designing advanced case illustrations that are built for longevity and are always in the best interest of the client.