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A Financial Plan is not a Retirement Income Plan

What most advisors put together in a financial plan are all the strategies for accumulating money so you have a large enough nest egg to retire. In a retirement income plan however, we determine how you spend that nest egg to make sure it outlasts you.

One plan is based upon you working to generate income, the other is based on your investments working to generate income.  

These are two very different strategies.

Financial Plan versus Retirement Income Plan—What’s the Difference?

When you are working, you are in an accumulation phase of your life. You are trying to determine how much money you can save each year combined with how much investment risk you are comfortable taking to reach your goals.

When it’s time for retirement, the questions switch to “How much do you need to spend each month?” and “How much investment risk is necessary to make sure your money outlasts you?”

The consequences for not adhering to your plan are much different as well. If you get off-track on your financial plan, you will either have to work longer or learn to live on less.  On the other hand, if you are wrong on your retirement income plan, you will have to reduce your expenses when you are older or potentially look into the most cost-efficient care situation, which is typically to live with family.

So, what does a retirement income plan entail?

Three Steps to Retirement Income Planning:

  1. Expense Review: Take a hard look at your expenses and break them down between essential expenses and discretionary expenses.  Essential expenses are those must have expenses like your utilities and discretionary expenses are your nice to have expenses, like vacations.
  2. Income and Expense Matching: Next, line up your potential income streams to each of these expense categories. Ideally you want your essential expenses covered by stable income streams such as Social Security, pensions, and immediate annuities. Your other assets should support your discretionary expenses. These assets should also be managed to minimize the tax impact on their distributions. Less tax means your investments will support your lifestyle longer.
  3. Asset Allocation: Coordinate your yearly income needs with your asset allocation. Immediate and short-term income needs can be invested in more secure investments such as money markets and bonds. Your longer-term income needs can be invested in bonds and stocks as a hedge against inflation.

Putting together a complete retirement income plan is not easy. The good news is the number of advisors specializing in this area has been growing, so help is available.

Ultimately, with a sound retirement income plan, you can spend less time on the things you don’t like to do and more time on the things you do like to do. You will likely also sleep better!

Bob Rauf is the founding partner of Meridian Financial. Meridian Financial has been helping clients with their retirement income strategies for over 25 years. To talk with Bob about a retirement income plan or other person and business financial planning needs, email him at [email protected].

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This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.