Build Your Retirement Spend Plan (Part 2)
Your Retirement Paycheck .
You need a retirement spend plan before you retire. This means that you need a plan so you can pay your expenses and live an abundant life for all of your retirement years. You don’t want to overspend and run out of money. Nor do you want to underspend out of fear and die with a mattress loaded with cash. Neither option is desirable!
Pivoting from the earning and saving years to the spend down years can be worrisome for many people. Am I spending too much? Is my portfolio properly invested to create enough income? When should I turn on Social Security? My pension? What else could I be doing to ensure that my assets cover my spending for as long as I live? A good plan can answer these questions and more.
It can feel like a daunting task to create a good spend plan. There are many moving pieces and you only retire once. But if done well, good planning not only answers the questions, but it also gives confidence and a sense of freedom.
There are two pieces to the spend plan puzzle:
- Your spending (money flows out)
- Your income or “paycheck” (money flows in)
This article will cover #2 above—how to build your retirement paycheck. The expense side, Item #1 was covered separately. It describes a realistic way to determine your retirement spending (budget). Why You Need A Retirement Spend Plan and How to Build One, Part 1 – Scheibel Planning Solutions
Remember, money isn’t the end goal. A wonderful, generous, happy and abundant life is the end goal. Money is just a tool to help you achieve that wonderful life. Keeping this top-of-mind helps to alleviate some of the confusion and stress around the details. But it requires some hard thinking on your part to get to your goals and dreams and your definition of an abundant life.
Structuring money-in flows (distributions from your assets) to match money-out flows (expenses)should consider the timing of each of income streams, including Social Security. It must also consider taxation, which is no small matter. (For tips on how to reduce your retirement taxes, read this article Lower your Tax Bill and Have More Money in Retirement – Scheibel Planning Solutions ).
Below are 6 steps to consider when building a sustainable paycheck in retirement.
Step One : Assess Your Resources
First, you assess your spending needs. Next, assess your resources. You will want to know which resources to convert to income and when, so that you can match the money-in and the money-out flows. Consider all sources of possible retirement income: workplace retirement plans (e.g., 401k, 403b 457b, pensions, stock bonus plans etc.), and other assets like savings, investments, real estate, annuities and life insurance.
Step Two: Fund Your “War Chest”
Your “war chest” is an amount of money that you can tap if the market goes down a lotor in the event of an expected expense or emergency. The goal of this money is simple: to be available when you need it. This bucket of money is kept in cash-like instruments (savings account) or other very conservative investments. Depending on your circumstances, it doesn’t need to be strictly cash in the bank. Yous “war chest” could be part cash and part other easily accessible cash, a home equity loan for instance.
The amount to have in your war chest / emergency fund varies based on the your individual tolerances and your circumstances. You don’t want too much in this fund because you could miss out on some needed growth of your assets if invested.
Step Three: Develop a Social Security Strategy
Arguably, one of the most important decisions in retirement is when to turn on your Social Security. You may know that the longer you wait to turn on this income stream, the higher the monthly payment will be. I sometimes recommend that my single clients wait to take this, but not always. It depends on factors such as your other income, your tax strategy and your health and life expectancy. When my clients are married, there are more options. If there is a higher income earner, I usually recommend that he or she wait until age 70 to turn on this income. This is because of the survivorship options. If Frank has a higher Social Security and pre-deceases Joanna, then Joanna can choose to take John’s higher Social Security income instead of her own. This is an estate planning decision as much as retirement income planning.
You should develop your Social Security strategy alongside your other fixed income sources, such as a pension or a personal annuity to know how much guaranteed* income you will have in which years. The turn-on periods can be adjusted to match each other and your expenses.
If you don’t have a pension through work but want more guaranteed income, you can ‘pensionize’ some of your nest egg by buying an annuity to create guaranteed income. The amount of assets to convert is highly personal and depends on many factors. Look at your income sources throughout your retirement (especially the Required Minimum Distributions RMDs) to help make the decision.
*Annuities can come with specific riders, fees, and charges, so it’s important to talk with your financial professional about if an annuity fits into your plan.
Step Four: Understand the Tax Part
The income tax piece is vitally important and often overlooked. Having a sound retirement tax strategy can reduce your taxes and thereby increase your income, a lot, especially over a long life. The conventional wisdom that is still offered by many advisors (and even the large wire-houses) is to wait to spend your 401k/IRA money until you’ve spent your non-IRA money, because it is assumed that you will be in a lower tax bracket in retirement. This may not be true in part because of the Required Minimum Distributions (RMD’s) beginning at age 72.If you have a large IRA/401k balance, it is possible that you will be in a higher tax bracket in later life.
Good tax planning for the duration of your retirement can help you assess and mitigate your tax bill for this year and also in subsequent years.
Step Five: Stay invested!
In most cases, I suggest staying invested in the market, even during down markets or turbulent times. Keeping large sums of cash may be counter-productive for retirement success. It is possible to be smart, take the proper amount of risk (for you and your circumstances)—even if you are conservative– and also stay invested with a sound investment strategy that aligns with your spend plan.
There are often-quoted statistics that suggest that if you miss just a small number of the best days in the stock market your end result could be dismal.
JPMorgan publishes simple data in its Guide to the Market. There, they show that if you missed the 10 best days for the S&P 500 between January 2000 and December 2019 (20 years), you would have less than half of the return than you would have if you left the money invested.**
**Source: JPMorgan Asset Management analysis. Returns are based on the S&P 500 Total Return Index.
Step Six: Wash, Rinse and Repeat.
Good planning is agile and your spend plan should be too The plan is made based on a set of assumptions. These must be adjusted over time as your life circumstances and priorities change. I review my client’s retirement income plansand the assumptions annually, sometimes more. We remain nimble and willing to make adjustments when necessary. This gives my clients confidence, and confidence can bring greater happiness.
Using are peatable process to match your money to your life, our firm works with women and couples near or in early retirement to help align their values with their money and make smart financial decisions. We can help you build your nimble retirement paycheck.
Please reach out for a conversation or question, or if you want a partner who can guide you through the retirement spend plan process, and help you make smart financial decisions while doing so.