What Is Income Planning and Why Does It Matter in Retirement?
Saving for retirement is only part of the journey. Eventually, the focus shifts from accumulating money to answering a different question:
How can I use what I have saved to create dependable income throughout retirement?
Income planning is an important part of financial planning. It involves estimating your retirement expenses, reviewing your available income sources, and developing a coordinated strategy for turning those resources into a retirement paycheck.
Retirement Income Is More Than a Withdrawal Rate
You may have heard of guidelines such as the “4% rule.” Rules of thumb can provide a useful starting point, but they are not a complete retirement-income plan.
Every household enters retirement with a different combination of:
Social Security benefits
Pension income
Retirement accounts
Personal savings and investments
Annuities or other insurance products
Part-time employment
Individual spending needs and retirement goals
Retiring at 62 requires a different strategy than retiring at 67 or 70. Someone who plans to travel during the first few years of retirement may also need more income initially.
Income planning brings these pieces together instead of relying on one general percentage or account balance.
Start With the Income You Will Need
A retirement-income plan should begin with your expected expenses—not with a product or investment.
Consider your monthly costs for housing, healthcare, transportation, taxes, travel, everyday living expenses, and other priorities. It is also important to distinguish between gross and spendable income because taxes, insurance premiums, and other deductions affect how much reaches your bank account.
Your expenses can then be compared with predictable income sources such as Social Security and pensions. Any remaining gap may need to be filled with withdrawals from retirement accounts, investments, annuities, or other assets.
Give Every Part of Your Plan a Purpose
At FMS, we sometimes describe this as "making every toe push." Just as every part of the foot helps a person move forward, every part of a retirement plan should have a defined job.
An income plan may coordinate several sources:
Social Security and pensions for foundational income
Cash reserves for emergencies and near-term expenses
Retirement accounts for planned distributions
Protected products for part of the portfolio
Market investments for income and long-term growth
The appropriate combination depends on your needs, risk tolerance, time horizon, tax situation, and overall circumstances.
Keep Accessible Money Available
Unexpected expenses do not stop when retirement begins. A furnace may need to be replaced, a vehicle may require repairs, or an unplanned healthcare expense may arise.
A commonly discussed starting point is maintaining approximately three to six months of expenses, along with additional money for foreseeable emergencies or major purchases. The right amount will differ for each household.
An accessible reserve may reduce the need to increase regular withdrawals or sell investments during an unfavorable market. However, keeping substantially more cash than necessary may limit the growth available to support a long retirement.
Build Flexibility Into the Plan
Retirement may last 20 or 30 years, or longer. During that time, markets, expenses, tax laws, health needs, and personal goals can change.
A retirement-income plan should therefore be reviewed and adjusted over time. During strong markets, it may be appropriate to draw income from certain investment assets. During a decline, cash reserves or protected assets may help reduce the need to sell growth investments at lower values.
A plan should also account for inflation. Income that comfortably covers expenses today may not provide the same purchasing power 10 or 20 years from now.
Use the ABC Planning Process
One way to organize these different financial roles is through the FMS ABC Planning Process, which divides financial assets into three broad categories:
A: Cash and Liquidity
B: Protected Growth
C: Risk Growth
This framework can help clarify which assets are intended for immediate access, which emphasize greater protection, and which remain exposed to market risk in pursuit of growth.
The appropriate mix is different for every person. The goal is to make the trade-offs easier to understand and give each part of the plan a purpose.
For a closer look, read The ABCs of Investing: Finding the Right Mix for Your Financial Plan.
Model Your Income With Our Downloadable Worksheet
Our downloadable income-planning worksheet provides a practical place to organize your:
Social Security and pension benefits
Retirement-account withdrawals
Annuity or insurance income
Investment and employment income
Expected monthly expenses
Emergency reserves
The worksheet can help you estimate your total monthly retirement income, compare it with your anticipated expenses, and identify areas that may need additional planning.
Download the income-planning worksheet to begin organizing your retirement-income picture.
The worksheet is an educational starting point and does not replace an individualized financial plan or professional advice.
Turning Retirement Savings Into a Retirement Paycheck
Income planning can help answer several important questions:
How much income will I need?
Where will that income come from?
How much should remain readily accessible?
How could market declines or inflation affect my plan?
When should my income strategy be reviewed?
The objective is to create a coordinated strategy for using your resources throughout retirement.
Contact FMS Financial Services to begin reviewing your retirement-income needs and explore a plan built around your circumstances.
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The information provided in this document is intended for informational purposes only and is not a solicitation to purchase or sell any security.