For most of your working life, the retirement objective may have seemed relatively straightforward: earn money, save consistently, invest prudently, and allow time to work.
As retirement approaches, however, the financial challenge changes.
You are no longer thinking only about how much the portfolio might grow. You are also asking how Social Security, pensions, investment accounts, and other resources will work together to support your lifestyle after your regular paycheck ends.
Key question You know how much you have accumulated. Do you know how those assets are intended to replace your paycheck? |
Retirement changes the direction of your money
While you are working, money generally flows into your retirement accounts. You contribute to an employer plan, add to an IRA, invest in a brokerage account, and build cash reserves.
In retirement, that flow begins to reverse.
Instead of regularly adding money, you may begin withdrawing from a finite pool of accumulated assets. Your investment portfolio may need to support living expenses while also addressing inflation, taxes, healthcare costs, unexpected expenses, and a retirement that could last for decades.
That is why a successful accumulation strategy does not automatically become a complete retirement-income strategy. A portfolio answers questions about how money is invested. A retirement-income plan must also answer questions about how and when the money may be used.
A collection of accounts is not necessarily an income plan
Many successful savers approach retirement with several financial resources:
· A current workplace retirement plan
· One or more plans from previous employers
· Traditional and Roth IRAs
· Taxable investment accounts
· Cash reserves
· Social Security benefits
· A pension or annuity
· Other property or sources of income
Each resource may be valuable. But simply owning these assets does not establish how they should work together.
A coordinated retirement-income process should help answer:
1. How much do you expect to spend?
2. Which expenses are essential and which are discretionary?
3. What dependable income may be available?
4. How much may need to come from your investments?
5. Which assets are intended for the first years of retirement?
6. Which assets are intended for later needs?
7. How could taxes affect the withdrawal strategy?
8. How will the plan be monitored as retirement progresses?
Without those answers, a retiree may have substantial savings but still lack a clear retirement paycheck strategy.
Start with the income floor
The first step is identifying income that may be available independently of regular portfolio withdrawals. Depending on your circumstances, this income floor might include:
· Social Security benefits
· Pension income
· Annuity income
· Part-time or consulting income
· Rental income
· Other dependable sources
The next step is comparing your projected income floor with your anticipated retirement spending. The difference is the retirement income gap, which is the amount the investment portfolio may need to help provide.
Income-gap framework Desired annual retirement spending |
This calculation does not answer every retirement question. It does, however, give your investments a more clearly defined job.
Organize retirement assets around time
Once the income gap is understood, the next question is how the available assets are intended to address that need over time.
The Lifetime Income Model uses time segmentation to organize retirement assets around when they are expected to be needed.
Money expected to support the early years of retirement has a different purpose from money that may not be needed for 10, 15, or 20 years. Near-term assets may emphasize liquidity and reduced volatility, while assets intended for later retirement periods may be given a longer investment horizon.
The objective is not to predict what financial markets will do next. It is to connect different parts of the portfolio to different stages of retirement.
Time segmentation does not eliminate investment risk, inflation risk, longevity risk, tax risk, liquidity risk, or the possibility of an income shortfall. Instead, it provides a framework for coordinating near-term income needs with longer-term investment objectives.
Retirement ROI may need a broader meaning
During your working years, ROI usually means return on investment. That remains important in retirement, but investment performance is not the only consideration. You may also need to think about the dependability, timing, and coordination of the income needed to support your lifestyle.
Another way to thing about ROI Reliability of Income |
The objective is not to guarantee that every future outcome can be known. No retirement strategy can eliminate uncertainty. The objective is to establish a disciplined process for determining what you may need, what income may already be available, what your investments may need to provide, when different assets are expected to be used, and how the strategy will be reviewed and adjusted.
Five questions to consider
1. Could I estimate my annual retirement spending?
2. Do I know which dependable income sources may be available?
3. Could I calculate the amount my investments may need to provide?
4. Does each major account have a defined purpose and time horizon?
5. Do I have a process for reviewing the strategy after retirement begins?
If one or more answers are unclear, your next planning step may not be choosing another investment. It may be developing a coordinated retirement-income framework.
From your last paycheck to your first retirement paycheck
You worked for decades to accumulate your retirement savings. The transition into retirement deserves the same level of preparation.
The Lifetime Income Model is designed to help successful savers organize accumulated assets around expected income needs and retirement time horizons. It begins by identifying the retirement lifestyle to be funded, calculating the portfolio-funded income gap, and assigning resources to different stages of retirement.
The result is not a prediction or a guarantee. It is a structured framework for moving from saving money to using money with greater clarity and purpose.
Take the next step
If you are within several years of retirement and are unsure how your savings will replace your paycheck, consider completing a Lifetime Income Gap Analysis.
The analysis can help identify:
· Expected retirement spending
· Dependable income sources
· The preliminary portfolio-funded gap
· Existing accounts and resources
· Areas requiring further tax, investment, or estate-planning analysis
Contact us to learn whether a Lifetime Income Model™- Gap Analysis is appropriate for your situation.