3 Key Goals for Building a Retirement Income Plan
Building a secure income plan — including an investing strategy and a withdrawal strategy — is easier if you identify your main objectives first.
During your working years — the accumulation phase of your investing life — the path is pretty clear.
You earn money. You save some of that money. You grow the money you saved.
And that’s it. Until it isn’t.
In retirement, when you’re living off the nest egg you worked so hard to build, it becomes necessary to make a major change of course. And that takes some planning, preferably with some guidance, with these three objectives in mind:
- You’ll need to line up reliable income streams. When you create your plan, you’ll want to make sure your day-to-day expenses are covered by reliable sources, including Social Security and a pension — if you have one coming. If you don’t, or if you’ll require more than what those two benefits combined will offer, you may want to consider filling the gap with an annuity* or other fixed income source.
- You’ll have to protect your money against a potentially catastrophic market downturn. When you’re earning money and have plenty of years ahead of you, you have time to recoup market losses. But in retirement, a downturn can be devastating, especially if it happens in the first few years. A portion of your portfolio always should be protected. All investments have risk, but some are safer than others, such as money market accounts, bonds or CDs If you’re considering insurance in addition to your investments, fixed annuities offer protection of your principal from market losses. (Talk to your financial adviser about the pros and cons of each of these options.)
- You’ll want to keep growing your money to outpace inflation. As you build your income plan, it’s important to include investments with growth potential, so that as you age, you can maintain your purchasing power. Just as an overly aggressive strategy can mean trouble in a volatile market, a strategy that’s too conservative can result in missing out on the money-making potential of stocks.
A plan starts with assessing guaranteed income
Each of these three key pieces can have a place in your portfolio, but it’s how you and your adviser put them together that will further help determine your ultimate success.
David M. Blanchett, head of retirement research at Morningstar Investment Management, recently wrote in the Journal of Financial Planning that his review showed “among the variables considered, the amount of existing guaranteed income had the largest impact on the estimated safe initial withdrawal rates.” I agree: Determining how much guaranteed income you already have, and then deciding how much you’ll still need and where it will come from is the foundation of any income plan.
After that comes the precarious balancing act between preservation and growth.
Put the bucket system to work for your retirement
I like to use a system that divides retirement into five-year timeframes — let’s say from 65 to 70, 70 to 75, 75 to 80 and so on. I suggest putting growth assets into that final bucket — the one that’s 20 or 25 years out — and if there’s a downturn, you don’t take withdrawals from that particular bucket. If you lose money in the final bucket (the growth bucket), you’ll have more time to build it back up before you need it, because you can still rely on your guaranteed income and your protected assets for income.
And that’s the bottom line, isn’t it? You want to be sure your money lasts as long as you do.
Work with your adviser now to identify your goals and draw up a strategy with the proper mix of income-producing financial products. Review it regularly to make sure it’s still a fit. And then enjoy your retirement, knowing you have a solid plan in place.
* Annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurer.
Freelance writer Kim Franke-Folstad contributed to this article.
Philip Detlefs offers securities through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. MAS and Investment Management Group are not affiliated companies.
About the Author
Philip Detlefs, Investment Adviser Representative
Investment Adviser Representative, Investment Management Group
Philip Detlefs is an Investment Adviser Representative with Investment Management Group. He has passed the Series 7, 63 and 66 securities exams and is a licensed insurance professional. He has a bachelor's degree in finance and marketing at Florida State University. He is married and has three children, Olivia, Harry and Hutch.