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5 Steps to Building a Retirement Income Plan

 steps to create a retirement income plan

Remember those television commercials from a decade ago showing people walking around town carrying a giant orange “retirement number” under their arms?

That is what everyone thought a retirement plan should look like. A big number that you divvy up and draw down during your golden years. With that strategy you are taking 100 percent of the risks many retirees may face, from market volatility to longevity risk to healthcare risk.

Modern thinking has taught us that, as the average life expectancy continues to climb (Could age 90 be the new 70?), our real concern should be more than a magic number for retirement savings. It should be creating a retirement income plan that ensures we will have income in retirement that lasts as long as we will.

How Do You Prepare for an Income-Rich Retirement Future? 

But first things first. How do you get into a position where you have the freedom to talk about planning for retirement income? By doing all the things you are (or should be) doing now, namely:

  • Contributing the maximum allowable to your 401(k) or IRA.
  • Re-evaluating your investment allocations as your focus shifts from your accumulation phase to preparing for your distribution phase.
  • Reducing major recurring expenses, such as paying down your mortgage.

By building a strong foundation of assets and implementing strategies first to grow them, then to protect and preserve them, you are setting yourself up for retirement income success. Here are some key steps that will help you get there.

#1: Understand the Major Financial Goals of Retirement

Your objective in planning for retirement income is fairly straightforward: You want to have more than sufficient retirement income sources for your lifestyle goals, and you want to reduce threats that can diminish, reduce, or even erase those income streams.

In a recent article, a Nasdaq.com contributing advisor pointed out that, by working with an experienced financial professional, your goals would be to:

  • Maximize your Social Security income
  • Minimize taxes on retirement income
  • Allocate a portion of your savings to lifetime income
  • Reduce or eliminate income volatility
  • Generate predictable income to cover essential expenses
  • Generate secure income to cover late-in-retirement expenses

#2: Determine Your Unique Retirement Lifestyle

Your retirement income need is as unique as your fingerprint. Todd R. Tresidder, a financial author who has written for The Wall Street Journal, Forbes, and Investor's Business Daily, among others, literally wrote the book on this topic: "How Much Money Do I Need to Retire?"

He points out that, in some ways, historical data on equities, retirement income trends, and other points of interest are largely irrelevant for your individual financial situation. Why? Because if trained economists can’t even predict what inflation will be one year from today, how can anyone else’s data help you determine, with complete confidence, what your retirement lifestyle will cost?

A better approach, Tresidder suggests, is that if you are within 5 to 10 years of retirement, grab a bottle of wine and your spouse and start sharing your dreams for retirement. "You want to answer the 'what, where, and when' questions," he writes. "Where do you want to live? What do you want to do? When do you want to do it? Answering these questions is essential because they determine 'how much' your retirement will cost. You must know the 'what, where and when'of retirement planning to go to the next step and figure out 'how much.'"

Is it your dream to travel the world, or to visit every U.S. national park from the comfort of your new R.V.? Each carries its own price tag.

Just as a statue begins to take shape as the sculptor carefully removes clay, your retirement picture—and the cost to fund it—begins to take shape with each conversation that gets you closer to your shared image of retirement.

#3: Don't Forget Your Monthly Basic Costs of Living

Remember how we said that your retirement income needs will be highly unique? That applies to your monthly fixed living expenses as much as the costs of your retirement dreams. While you outline your shared retirement vision with your partner, it's also crucial to estimate what your monthly retirement living expenses will be. 

If everyone has a unique 'income footprint,' how could you even begin to estimate your future living expenses, you might ask. Well, the good news is you have years of past and current spending to work off. Depending on our personal age, there may be even decades of lifestyle and monthly spending to use as a basis.

To begin calculations of your retirement spending estimates, Tresidder writes that you should use "one full year of your current spending as your benchmark." You will want to build as comprehensive of a spending picture as possible. Housing, food and groceries, transportation, utilities, clothing, personal care, entertainment, and so on -- record your current monthly spending amounts in these areas. Don't forget budget items that are paid annually, either, like insurance.

Tresidder mentions that you should create a spending snapshot that is complete as possible. It's also important to include miscellaneous items, like holiday spending, and if you have any spending items that are unique to your household, be sure to take account of those, too. 

#4: Lower Your Expenses to Raise Your Income

As we have suggested, being smart about whittling down large expenses will free up more income to fund your ideal retirement, and potentially prepare you for unexpected, but likely, expenses faced by retirees.

If you are on track with savings, consider contributing more to your monthly mortgage payment, which will pay down your principal more rapidly. Tresidder reminds us that not only will living mortgage-free in retirement lower our income needs, our homes are a "uniquely protected asset against certain debts and financial obligations. Many retirees feel more secure and sleep better at night when they own their home free and clear."

Another recommendation is to avoid and get rid of consumer debt. Conserve your financial resources by foregoing buying the latest model of car or racking up credit card debt. Living within your means will likely become a mantra in retirement, so get a head start on mastering that concept now. As Tresidder points out, "You should only spend what you can afford because retirees need to earn interest – not pay it."

#5: Look for Solutions that Help You Achieve Your Income Goals

So, now you would have a better idea of what retirement income needs might look like. The next step is creating personal strategies that give you the income, cash-flow, and financial freedom to enjoy your lifestyle of choice.

Depending on your risk tolerance, personal situation, and other individual factors, a number of income strategies could be tapped. Since we talk about "Safe Money" on this site, we will briefly mention income strategies that use the contractual lifetime income guarantees of insurance vehicles.

If you were offered a payout that ended in a set number of years or one that was guaranteed to last for the rest of your life, which would you choose? Many people, to the tunes of billions of dollars in premiums each year, opt for the latter, most notably using annuities.

A primary function for annuities is as a transfer-of-risk strategy. Instead of shouldering potential pitfalls like longevity risk, market risk, and income risk, you can move more of these risk potentials to the insurance company. With their contractual guarantees upheld by an insurance carrier, annuities can be used for:

  • Principal protection, or protecting your money from market investment risk,
  • Income certainty, or generating a guaranteed retirement income that can last for a lifetime,
  • Guaranteed growth, or growing some of your portfolio money with a minimum guaranteed interest rate,
  • Long-term care, or getting an annuity with a long-term care benefit (especially when other long-term care planning strategies aren't available),
  • Legacy planning, or using an annuity contract for a wealth transfer to loved ones


Annuities are the only financial product which can offer a guaranteed income, whether it's for a set period or the rest of your lifetime. That can help with what financial professionals call the "risk multiplier" of retirement: longevity risk, or the possibility of running out of money over what could be decades in retirement.

More Confidence with Professional Financial Guidance

These suggestions are good "retirement DIY" steps to build a solid retirement plan. A variety of income strategies can be used to make your dream retirement a reality, and they all involve the use of different financial products and vehicles. Above all, your retirement income plan should make sense for you -- investments, savings, insurance, assets, and all. 

Research and studies show that working with a financial professional toward your retirement goals can make a real difference. Investors with a guiding financial professional may see higher retirement savings, better overall retirement financial readiness, and more peace of mind.

If you could benefit from the help of a knowledgeable guide, financial professionals at SafeMoney.com can assist you. Use our "Find a Financial Professional" section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

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