What is retirement income planning?

Income is the basis for retirement. Without income, you can’t retire. That is why it is crucial to plan your income in retirement. Your income plan in retirement will usually be more than how to take Social Security and at what date do you actually retire. Income planning is about the distribution of your assets.

I am sure, just like most, you would like to maintain your lifestyle while you are in retirement just as much as you were working. I am also sure, just like most, you would like to not run out of money in retirement. Many studies have shown that the number one fear in life, other than public speaking, is outliving your money. That is why distribution of your assets is even more important that your investment allocation, your next vacation, or your retirement date. Your income plan will help you dictate where your assets should properly be placed to make sure you won’t run out of money in retirement and at the same time hopefully maintaining your lifestyle.

How to begin:

First thing to do is to understand how much income you will need in retirement each month. To be conservative, plan to spend the amount you are spending today unless you know a mortgage or major reoccurring expense will no longer be around when you are retired.

Now that we know what your expenses look like for you in retirement, you can look at your assets, including Social Security, to determine if you have enough assets. A quick rule of thumb is take your total expenses, minus social security and pension income, and multiply it by 25 (or 30 if you want to be more conservative). That number is roughly the amount you need have saved to give you a good chance of not running out money in retirement. It is not bullet proof, but if you don’t have an idea, this is a good start.

The next part is understanding how to allocate your funds based on when you need them, or when you have to distribute your assets. Some people like to use the 5 year, 10 year, and 15 year bucket model, but I like to use something a little better. I call it the money you need for income now, the money you need in your short term reserves, and the money you plan to leave behind as your legacy.

Income that you need now

Income that you need now is income or money that you want to be able to rely on no matter what is going on. Whether the stock market is up or down, or interest rates are up or down, I want to make sure that you are able to take the income safely and reliably to maintain your lifestyle.

The Reserve Bucket

The reserve bucket is money that you may need to use in case of an emergency or if you want to take that big trip. Typically you don’t want to take a lot of risk with this money depending on when you may need it, but this money shouldn’t uproot your lifestyle.

Your Legacy Money

Your legacy money is money that you can keep trying to grow, or you can look at other things that you may want to cover for the future, such as long term-care. Understand what the goals of each dollar you own is crucial so that you have an idea of what that dollar may be used for.

Once you have figured out the different amounts needed in each bucket, the next part of income planning is figuring out how to take it out tax efficiently. There are lot of things you can do while you are in retirement and while you are still working to make things more efficient, such as moving money to a Roth or deferring Social Security. Finding a CPA or tax advisor that understand taxes in retirement can save you a lot of money and prevent you from making big mistakes.

The best way to coordinate all of this is getting a retirement income plan put together for you. You either meet with a financial advisor or you try and create the income plan yourself. We provide all of our clients with an “income for life” plan so that they know how to structure their assets best to make sure they can maintain a successful retirement.

Video Transcriptions

Hi. Vince Oldre here again to talk to you about what is income planning. Income planning is different than what it was for you when you first started working. I’m talking about income planning when it comes to retirement.
We now have to figure out how to distribute all these assets that you’ve now accumulated. The basis of retirement is that you cannot have a retirement, or you cannot retire without income. That’s why income planning is all that more important in retirement.
There’s three things, or three levels that I believe that you need to have when it comes to your income planning. One is you need to have the income to maintain your lifestyle.
I know most of you, if you are a baby boomer, or a pre retiree, or someone that’s already retired, you want to make sure that you can have that same amount of income that you’ve been able to have throughout your entire life.
That way, you can maintain your lifestyle and do the things you want to do, still gift to your grandchildren, or you children and do those trips that you like to do, maybe travel the world, or golf. It’s important to have that income when you retire to maintain your lifestyle. I hope, for everyone that’s watching this video, is able to maintain their income, or maintain their lifestyle when they retire.
What you need to do to make sure you can have enough income is first understand how much you are spending. Believe it or not, a lot of you do not know how much you’re actually spending every year.
First, calculate how much you’re spending. Then you’ll have a better idea of how much you need in retirement as far as how much income you need every single year.
Now that we have your income covered to maintain your lifestyle, the next thing that I have as far as a retirement bucket, or for an income bucket is your reserve. The reserve bucket needs to be there for any type of unexpected event such as maybe we have to replace a roof, maybe buy a new car. Maybe we have to help someone that if we have a medical, or a health event we might need to have cash available. As long as we have some reserve, that’s great.
The next bucket is our legacy. If we have our income covered, then we can take a little bit more risk with our reserve bucket. The rest of our assets that we plan on leaving to our children, or to our beneficiaries, or maybe to charity, we might be able to take a little bit more risk with. That’s because it’s our legacy bucket. We may or may not really need that for income when we are in retirement.
Now that we have our three buckets, our income for now, our reserve bucket, and then our legacy bucket, we have to think about how we’re going to allocate those funds based on our risk.
If we want our income to be there for the rest of our lives, we might want to take very little risk with the income that we need to maintain our lifestyle. We can take a little bit more risk with the reserve bucket and maybe even a little bit more on our legacy bucket depending on what your risk tolerance is.
Before you make any of these changes to your own retirement plan, as always, I recommend that you meet with a financial advisor that can help you with this. If you have any questions when it come to retirement, please feel free to email us, or leave us a message here.
If you want to attend one of our complimentary educational workshops, you’re more than welcome to. Just go to our web site and look at our events page. You can sign up for one of our complimentary workshops. Until then, I’ll look forward to talk to you next time.

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Minneapolis Financial Planner | What Is Retirement Income Planning?
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