Key to Peace of Mind in Retirement: Income Planning

A retired couple relax on their deck, looking happy.

(Image credit: Getty Images)

After carefully saving over decades and building a healthy nest egg, you want to spend your retirement relaxing, not worrying about market performance or account balances — but it’s hard to remain calm when the economy slows or Wall Street falters, especially when you’re living without a regular paycheck from an employer.

Thankfully, it’s possible to generate dependable income during your golden years to bring more peace of mind.

Income planning goes beyond dollars and cents to bring more certainty to your financial plan. It doesn’t just help pay for your retirement expenses but also gives you confidence to fully enjoy the retirement you’ve worked hard to save for.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

What is income planning?

An income plan protects you from running out of money in retirement. It helps ensure you have access to the right money at the right time to cover your expenses.

When strategizing your income plan, it’s important to consider everything from the tax liability of your assets and potential market risk to your individual needs. Most importantly, an income plan should include sources of guaranteed income that essentially replace your paycheck when you stop working.

Income planning improves well-being

Generating guaranteed income provides retirees with more financial and emotional stability.

Guaranteed income increases overall well-being in retirement, helping people enjoy their golden years. On the flip side, those who have saved less and lack dependable income sources report that their retirement lifestyle doesn’t live up to their expectations, according to the Employee Benefit Research Institute.

The Retirement Income Institute found that retirees with guaranteed income report a higher ability to spend money without stress.

In other words, an income plan helps you live the kind of lifestyle you want in retirement — traveling, golfing, dining out with friends and family — without worrying about market fluctuations because you have a reliable source of income that is not dependent on stock market performance.

Guaranteed income decreases risk

Savers and investors face two major risks: volatility and withdrawals. When you retire, you’ll face them simultaneously for the first time ever.

Before your golden years, volatility is not as scary because younger investors generally have time to recover from market fluctuations. Withdrawing money from your accounts is not usually scary, so long as the market performs well when you do so.

Volatility and withdrawals become a major risk when they happen at the same time, which is a reality many retirees face. The combination of these problems is known as sequence of returns risk. This potential problem leaves many retirees wondering, “Will the markets be up or down when I need to use my money?”

Some retirees find comfort in the stock market’s average annual return of 10% — but averages are not actuals. When you’re taking money out of an account, actual returns matter. Anyone who retired in 2008 or 2020 will tell you so.

Let’s say the markets are down 10% when you retire, and you take out another 5% of your account balance to pay for your expenses. You’re now down 15%. Your accounts would need to earn 18% just to make up what you lost!

A good income plan will help decrease your sequence of returns risk by including investments that are not completely dependent on market performance.

Guaranteed income sources

Executive coach Marshall Goldsmith once said, “What got you here won’t get you there.”

The types of investments that got you to retirement — most commonly stocks — might not get you through retirement. It’s important to have guaranteed income sources to cover your essential expenses, no matter how the market performs.

The extras — travel, hobbies, etc. — can be covered by riskier, market-dependent investments.

Social Security, real estate or pension annuities (also known as income annuities) are common sources of guaranteed income.

Most workers don’t have access to an employer-sponsored pension plan, but what few people know is that anyone can have a pension. They’re offered to the general public if you buy them on your own through a pension annuity or guaranteed pension annuity.

Most modern annuities include several benefits that employer-sponsored pension plans often lack, such as a death benefit. Most pensions end or offer reduced payments when the plan holder dies.

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With a death benefit on an annuity, the surviving spouse gets access to the same income, even if the annuity owner passes away.

Other annuities can include long-term care benefits, disability assistance and even inflation protectors to offer even more security in your golden years.

Income planning strategy

Creating a comprehensive income strategy to meet your retirement needs requires careful planning. The difference between a strategy and just doing something is intentionality and long-term focus. It involves thinking ahead and choosing the most effective path.

When creating an income plan, you need to think through potential obstacles, risks and opportunities to find the investment options and sources of retirement income that best fit your needs.

Some financial instruments are good at providing income, but they're not made for high growth. Some investments are made for high growth, but they don't provide good income.

Rather than trying to find the one tool that can do it all, income planning looks at all the options and decides which ones can be leveraged at certain times to bring more stability to your financial plan.

When creating an income plan, ask yourself three things:

What kind of lifestyle do I want in retirement?
What assets do I currently have?
What’s the most efficient way to use what I have to accomplish my goals?

When we create an income plan for clients, we run their funds through several hypothetical scenarios to see what kinds of money moves make the most sense. It helps to see the potential risks and benefits without putting your actual money at risk.

When it comes time to create guaranteed income and strategize your income plan, make sure your financial adviser is stress testing your plan to identify and solve any potential problems long before they happen.

The bottom line

You deserve a retirement worthy of the sacrifices you made to save and prepare for the future.

To avoid worrying about running out of money in retirement, build a proactive plan that guarantees income. This will help you feel more secure and give you the freedom to relax and enjoy your golden years to the fullest.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As the founder and CEO of Momentum Wealth, Nico Pesci is passionate about creating efficient retirement plans and helping clients adapt to volatile economic environments. After watching his parents struggle to keep their retirement savings during the 2008 financial crisis, Nico founded Momentum Wealth to help people like his parents build the confidence they need to enjoy the retirement they deserve.