How to Plan for Retirement

Why is Income More Important than Assets in Retirement Planning?

This question is crucial for retirees. After all, retirement can last for 30 years or more, and mistakes can lead to significant financial complications.

In previous discussions, we’ve highlighted how income planning differs from investment planning, particularly with its emphasis on generating monthly income. Unlike the working years, when accumulating assets and replenishing them with employment income is possible, retirement is a phase of “distribution,” where we rely on our nest egg for income. Seniors don’t have the luxury of replenishing their savings through employment. For this reason, among others, focusing on retirement income is paramount.

Here’s why income should take precedence over assets in retirement planning and why this approach might benefit your planning strategy.

1. Income Ensures a More Efficient Planning Framework

Income, as it pertains to cash flow, allows for more efficient financial planning. While income is a well-understood component of retirement finances, cash flow management is equally crucial. Cash flow management involves using income streams to cover retirement expenses. This includes:

• Diverse Income Sources: Retirement plan distributions, Social Security benefits, guaranteed pension payments, annuity payouts, and part-time employment income.
• Income Timing: Effectively managing when money is received from various income sources and using it to pay bills and expenses punctually.
• Expense Management: Ensuring adequate funds for various retirement expenses, including fixed monthly costs, discretionary spending like vacations, and unexpected emergencies.

By relating income to expenses, focusing on monthly income can enhance planning efficiency. Nobel laureate Robert C. Merton points out that in the current retirement planning landscape, where many depend on 401(k)s and other defined-contribution plans, decision-making is often influenced by behavioral biases.
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As we approach retirement, we face many decisions. Many of these decision-points revolve around future financial life. Retirement income planning – or creating a plan to cover expenses and retirement uncertainty – is an essential step.

But everyone has different income needs, and they vary in their readiness for retirement. Plus today’s retirement landscape is far different than what our parents and grandparents dealt with. In the past, a steady pension from an employer, dependable income from Social Security, and a small fund of retirement savings was standard fare. Now those days are largely a distant memory for most Americans. Read More

In the past, we’ve talked about the importance of being prepared for retirement. Of course preparation is different for everyone. For one, women will have different retirement needs and goals than men.

It also depends on what employment capacity you’re in. If you’re employed by a large company, for instance, you may have a retirement pension plan via your employer (though these sorts of perks from employers are disappearing). But what about planning for retirement if you’re self-employed?

According to various data sources, there are roughly 10 million self-employed Americans – from business owners and independent contributors to freelancing professionals. In a recent TD Ameritrade survey, around 55% reported they’re behind on retirement savings. On the whole, baby boomers have an average windfall of being $335,000 down from their retirement savings objective. Read More

Today’s economic conditions remain uncertain, and it ‘s having a tremendous impact on how Americans foresee the future. In a nationwide public opinion report from the National Institute on Retirement Security, many Americans were found to be anxious about their retirement. Among those surveyed, 86 percent indicated they believe America is facing a looming retirement crisis. And in addition, 75 percent said they are concerned about their capability for achieving a secure retirement.

Given present circumstances, it’s easy to understand these fears. Many people worry about whether they will have enough money in their retirement years. It could be for paying medical expenses, maintaining a certain lifestyle, or covering costs of daily living. Much of the retiree community is thinking about how much money they will be able to leave to their loved ones, as well. Read More