Sometimes we have all the elements for a great retirement, but until we put them together the right way, we don’t get the result we want.
I call it the H2O problem. We have plenty of oxygen in the atmosphere. Likewise, hydrogen. It seems simple, but until two atoms of hydrogen combine with one of oxygen, we will never get water.
When planning for retirement income, it is risky to wait for the right combination of elements to join on their own. They don’t just fall into place; you have to know what each can do and put them together in a way that produces a whole greater than the sum of the parts.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You may sit with financial advisers who can describe all the elements required for a successful retirement, but they might not offer all of those elements in their own retirement planning practice. Maybe it’s because of regulatory or business model considerations. And even when all these elements are available, the adviser may not know how to assemble them.
It’s not easy. Retirement income requires consideration of many more elements than just the two needed to create water (H2O), and many more combinations — like 50 trillion. Literally.
The requirements of a plan for retirement income
As a starting point, your plan should be about income: starting income to meet your current needs, increasing income to help offset inflation, lifetime income so you don’t run out, and less volatile income so you feel secure.
But most investors have additional concerns, such as a legacy they want to pass on to kids and grandkids, and availability of liquid funds in case of unexpected needs or emergencies. They might also want the plan to be convenient and easy to manage, with income payments made on a regular monthly basis, and flexible so that the plan can adjust to changing circumstances or economic conditions.
And the plan elements should be easily understood, offered by highly rated companies, low-cost and tax-efficient. Bottom line: Focus on the plan and make the elements as time-tested as possible.
Identify the elements of a successful plan for retirement income
Just like in chemistry class when reviewing the periodic table, go to the list of financial products available to investors like you and select those that make sense. Or ask your advisers for their list.
Here is our list of retirement plan elements (including the most likely savings source):
- PD: Portfolio of high-dividend stocks (invested from personal savings)
- IAN: Income annuity with guaranteed payments starting now (invested from personal savings whenever possible)
- PF: Portfolio of fixed income bonds (invested from personal savings)
- IAF: Income annuity with guaranteed payments starting at future dates you select (invested from both personal savings and rollover IRA)
- PB: Portfolio balanced between growth stocks and fixed income securities (invested from rollover IRA as source of withdrawals)
Here’s a picture of how the elements might look if you were creating a retirement molecule.
Putting the elements together
As a compound your plan might look like PD3IAN4PF1IAF2PB4. However, and this is the tricky part, unlike this jumble of elements, the compound you’ve engineered needs to be designed to be able to change form over time and continue for your entire lifetime.
The bar chart below demonstrates the income these elements produce when combined using the Go2Income planning algorithm. Note how each element contributes different amounts at different times over your lifetime. Of course, the portfolios will contribute income based on the planning assumptions, while the annuity payments are guaranteed* and serve as the plan’s foundation.
Results of your plan
To evaluate your plan, see if it meets your income requirements: starting income to meet your current needs, increasing income to help offset inflation, lifetime income so you don’t run out, and less volatile income so you feel secure. And also look at your objectives for legacy and liquidity.
Unlike H2O, there are virtually an infinite set of possible combinations to match your objectives and personal circumstances.
In the end, creating a successful plan will allow you to:
- Use basic elements in the most effective and efficient way
- Create a plan that combines the right mix of elements
- Personalize the combination to meet your objectives
If you are interested in working on your own “chemistry” project, visit Income Allocation Planning at Go2Income. We will ask a few easy questions so you can design a plan that meets your objectives.
* Guarantees are subject to the claims-paying ability of the insurer.
Related Content
- How a Fixed Index Annuity Can Manage Retirement Income Risks
- A Challenging Retirement Plan Mission: Not Impossible
- Retirees: Worry Less About Markets, Long-Term Care and Taxes
- Annuity Payments Are 30% to 60% Higher: Time to Reconsider
- Don’t Bet Your Retirement on Stocks: Follow These Four Tips
-
Original Medicare vs Medicare Advantage Quiz: Which is Right for You?Quiz Take this quick quiz to discover your "Medicare Personality Type" and learn whether you are a Traditionalist, or a Bundler.
-
Ask the Editor: Capital Gains and Tax PlanningAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on capital gains tax rates and end-of-year tax planning
-
Time Is Running Out to Make the Best Tax Moves for 2025Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
Time Is Running Out to Make the Best Moves to Save on Your 2025 Taxes
Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
4 Smart Ways Retirees Can Give More to Charity, From a Financial AdviserFor retirees, tax efficiency and charitable giving should go hand in hand. After all, why not maximize your gifts and minimize the amount that goes to the IRS?
-
I'm an Insurance Pro: If You Do One Boring Task Before the End of the Year, Make It This One (It Could Save You Thousands)Who wants to check insurance policies when there's fun to be had? Still, making sure everything is up to date (coverage and deductibles) can save you a ton.
-
3 Year-End Tax Strategies for Retirees With $2 Million to $10 MillionTo avoid the OBBB messing up your whole tax strategy, get your Roth conversions and charitable bunching done by year's end.
-
'Politics' Is a Dirty Word for Some Financial Advisers: 3 Reasons This Financial Planner Vehemently DisagreesYour financial plan should be aligned with your values and your politics. If your adviser refuses to talk about them, it's time to go elsewhere.
-
For a Move Abroad, Choosing a Fiduciary Financial Planner Who Sees Both Sides of the Border Is CriticalWorking with a cross-border financial planner is essential to integrate tax, estate and visa considerations and avoid costly, unexpected liabilities.
-
I'm a Financial Adviser: This Tax Trap Costs High Earners Thousands Each YearMutual funds in taxable accounts can quietly erode your returns. More efficient tools, such as ETFs and direct indexing, can help improve after-tax returns.
-
A Financial Adviser's Guide to Divorce Finalization: Tying Up the Loose EndsAfter signing the divorce agreement, you'll need to tackle the administrative work that will allow you to start over.
