How Does Income Planning Differ from Investment Planning?

There are many decision-points leading up to retirement. Much of this process relates to financial planning. Should we wish to maintain a comfortable lifestyle, we must have sufficient income to support it. An effective retirement plan will lay out not only income goals we need to achieve, but also personalized strategies to sustain income security.

In earlier years, many of us focused on investment strategies to build up wealth. You may have worked with a financial advisor to find investments or investment packages with solid return potential over time. Or you may have engaged in investment planning yourself. However, retirement brings change, and this includes a shift in financial planning focus – an emphasis on planning for income.

Here’s a quick look at how income planning is different from investment planning – and why you may want to incorporate an income-focused retirement planning approach.

Differences of Income Planning versus Investment Planning

They rely on different planning markers. One primary difference is that income planning and investment planning use different benchmarks. In the case of retirement income planning, monthly income is used as a means to set goals and gauge success. On the other hand, investment planning depends upon net-worth related markers to measure progress: asset values, investment returns, and investment volatility.

In the past, we have mentioned insights from Dr. Robert C. Merton, an economist and Economics Nobel laureate. Dr. Merton is a founding father of modern finance and a widely-respected authority on retirement planning matters. In a Harvard Business Review article, The Crisis in Retirement Planning, he observes that investors often rely on the wrong markers for retirement planning. With the disappearing numbers of pensions, many pre-retirees are relying upon defined-contribution plans, such as 401(k) plans, for retirement saving purposes. But, as Dr. Merton notes, the reporting markers for defined-contribution plans are those net-worth markers mentioned earlier – markers which use the language and measurement of assets instead of income.

“Our approach to saving is all wrong. We need to think about monthly income, not net worth,” Dr. Merton writes in summation. If you would like to read it, here’s the entirety of the Crisis in Retirement Planning article.

Suitability depends on personal variables – especially life stage. In our view, another difference is suitability. The question of which planning approach is more appropriate varies from individual to individual. It depends on your age, needs, and situation.

Financial life can be broken down into three stages: the accumulation phase, the preservation phase, and the distribution phase. To summarize it:

• The accumulation phase begins when someone starts their working life and begins saving up funds for their later years.
• The preservation stage is the period before retirement – 10-15 years before someone retires. For many people, this period is when they are in their fifties.
• The distribution stage is when someone is retired and drawing on their nest egg for income – they are taking distributions from their portfolio for income purposes.

Broadly speaking, investment planning is more geared towards when we are in the accumulation phase. We have longer time-frames for recovery should we go through a market correction. In the preservation stage, financial planning tends to focus on wealth protection strategies, or ways to keep life savings intact. Then the distribution stage focuses on planning for how to make those savings last for all the retirement years. At that phase, timelines for recovery are shorter and more critical. So income planning may be a more suitable approach at these later-stage points.

Income planning focuses on longevity of income. We mentioned earlier how monthly income is an important marker in income planning. Another point is preparing for longevity risk, or the possibility of running short of money in retirement. Studies suggest that at present, retirement may last for 30 years or longer. If we would like to maintain a certain lifestyle, being financially well-prepared for all those years is critical.

With monthly income as the priority, a qualified income strategist can help you analyze your current spending patterns, anticipate what your future spending may be, and what income you will need to sustain it – all over a long time horizon. This includes examining the sources of income you have in place – guaranteed income from Social Security and maybe a pension, for example – and determining if there are any income gaps. Then you can consider different income-producing solutions to cover the gaps and create long-term financial security.

What about Your Retirement Planning Needs?

These are just a few general ways in which investment planning and income planning differ. As we covered, what planning method is better for your needs depends on your age and circumstances. If you are in early retirement, or are nearing retirement, you may want to consider working with a financial professional who understands the dynamics of this life stage.

If you’re ready for professional guidance, SafeMoney.com can help you. 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.