3 Reasons to Focus on Income over Assets in Retirement Planning

What is the more important marker in retirement planning: income or assets? This is an important question for retirees. After all, retirement can last for 30 years or longer – it isn’t a time to make mistakes. Inferior planning may lead to income gaps or other unnecessary financial complications.

In past discussion, we have noted how income planning differs from investment planning – especially with its focus on monthly income. Retirement is a phase of “distribution,” or where we draw on a nest egg for income. It’s different from the working years, when we are accumulating assets and can “refill the bucket” with employment income, should we incur investment losses. Seniors don’t have this luxury during their retirement years. For this reason, among others, retirement income arguably should be the primary focus.

Here’s a look at some reasons why income should be a planning priority – and why you may want to account for this in your planning, as well.

Why Should Income be Prioritized over Assets in Retirement Planning?

Income is related to cash-flow, which lends to more efficient planning. As we all know, income is an important part of retirement finances. However, cash-flow is also a critical part of the equation. It’s the process of how we use our income streams to pay for retirement expenses. Cash-flow management covers many areas, including:

• Income sources – retirement plan distributions, Social Security benefits, guaranteed pension benefits, annuity payments, part-time employment income, or others
• Timing of income payments – efficiently managing when money comes from income sources, and using it to pay expenses and bills on time
• Dealing with expenses – having sufficient monies for different kinds of retirement spending: monthly fixed-income needs, miscellaneous expenses (for example, vacations), and unexpected costs for emergencies or unforeseen events.

Because cash-flow relates income to expenses, an emphasis on monthly income can be more efficient from a planning standpoint. Nobel of Economics laureate Robert C. Merton writes that in today’s retirement planning landscape – where many investors rely upon 401(k)s and other defined-contribution plans for savings goals – decision-making is often driven by behavioral biases.

If retirement planning focuses more on assets, it prioritizes asset values and investment returns. Those are return and risk variables, which are different than monthly income – these units of measurements make it more difficult for us to set cash-flow goals and determine the likelihood of meeting them.

As a planning marker, income corresponds better to spending projections. Let’s elaborate on the last point. Spending forecasts are another part of retirement planning. This involves determining what future spending may look like, and what we will need to cover it.

Just as retirement brings different financial priorities from our working years, it gives way to new risks. A primary risk is income uncertainty – or the possibility of running out of money while in retirement. When we consider the role of Social Security benefits, or maybe even pension distributions, in retirement, we use the language of income to describe it. Likewise, we focus on income units when thinking about spending objectives – what sums of money we will need to pay for different retirement expenses. When thinking about a 401(k) plan or other investment-related vehicles, we use the language of net-worth to measure progress.

Because monthly income is more tangible to setting concrete spending goals in retirement, it can be a more efficient planning marker.

It may help create a better framework for managing retirement finances. Many people rely upon multiple income sources in retirement. According to the Social Security Administration, Americans aged 65 and older receive a majority of their income from four sources. Should a retirement portfolio be one of those income-generating vehicles, it’s important to be judicious in investment decisions.

As noted earlier, Dr. Merton observes that investment decisions tend to be based on emotional biases – instead of solid, objective insights. When income is prioritized as a retirement goal, it can help bring clarity to planning – we can see where income gaps may arise and determine what solutions are suitable to fill those gaps. On the other hand, if asset values are the primary focus, it raises the possibility of less-disciplined decision-making.

Consider, for instance, a situation in which we have lost money due to a falling stock market. It may be tempted to sell off investments to stave off further losses (when, in reality, we’re just putting off recovery) – which means further losses in the income we would draw from those investments.

What about Your Retirement Strategy?

Do you know if your retirement financial strategy prioritizes income enough? At SafeMoney.com, you can connect with a financial professional who will assess your existing strategy and see if you can take any more steps toward achieving your goals.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.