Planning Your Retirement Income
Step#1: Review your situation.
Analyze what you have to work with. Pull together and organize all pertinent documents such as, tax returns, investment and banking statements, pension and profit sharing paperwork etc. Below are some categories to help you get started.
- Estimate monthly and annual expenses
- Do a full accounting of all assets that are available for your retirement plan
- Consider the affects of taxes on the types of investments and accounts you have
- Research your social security options
- Determine what if any pension options you may have
Step #2: Know your Needs.
Know what your needs are before you make any investment choices. Determining exactly what your needs are is crucial to building your plan. Here are a few of the items you might think about when making these determinations.
- Medical expenses; Everyone is different. In some cases expenses rise while for other they drop. Be honest with yourself about your health when estimating your annual medical expenses.
- Travel; Now that you have time on your hands are you the type of person that will travel extensively or not.
- What are your hobbies; If you like antique cars you most likely found your self at the local auto part store once a month when you were working, rest assured you'll find your self there a lot more in retirement.
- Food and entertainment; With time on your hands will you be likely to spend more time filling your free time with dinners out and movie nights or are you more of the walk on the beach type.
- Fixed expenses; this goes with out saying don't forget mortgage, electricity etc.
Step #3: Considerations for Building Your Portfolio.
Now that you know your current income needs for your retirement it's time to determine how to build your portfolio. Here are a few things to think about.
- Use an assumption of 4% or 5% to calculate your annual income from your investments. As an example $1,000,000 will bring between $40,000 and $50,000 in annual income.
- Using the above percentages determine how much if any assets will be left to hedge inflation. As an example if you have saved $1,500,000 and you need $50,000 in current income you will have $500,000 left over for future inflation.
- Consider the amount of risk you're willing to take
- Consider the different types of risk; Inflation, interest rate, market, longevity, liquidity, and concentration risk.
- Consider whether you want to shoulder the risks yourself or not; It is possible to move much of your risk onto the issuers of your investments with items such as U.S. Treasuries, CD's, and insurance product.
Step #4: It's Time to Build Your Portfolio.
Using our example of $1,500,000 and an income need of $50,000 here would be some examples of how you can build your portfolio.
- $1,000,000 in mutual funds with a yield of 5% would give you your $50,000 in income and leave you with $500,000 to invest for future income needs. In this example you are taking all of the risks on yourself.
- $1,500,000 in U.S. treasuries at 2.85%(current 30 year treasury rate as of 8/2/2017 found on treasury.gov) will give you $42,750 a year in income, there will be nothing left over for future needs.
- $1,000,000 in a variable annuity contract with a 5% income for life rider. In this scenario you will receive $50,000 a year in income guaranteed by the insurance company and you'll have $500,000 for your future income needs. In this example you have put the income risk on the back of the insurance company and kept the investment risk on yourself.
What these three examples show you is that the amount of money you saved will in large part determine the risk you'll need to take to meet your income needs.
Step #5: Re-evaluate your Portfolio on a Regular basis.
The process of income planning will continue throughout your retirement. Your new life of living off your nest egg isn't a single point in time, where you create a plan, set it and forget it.
You'll want to continue to watch and revise your plan as needed. When markets are changing, you may want to change your balance of stocks and bonds to increase or decrease risk in your portfolio over time. You may also consider annuities, which can act like a personal pension by turning a portion of your investments into a guaranteed lifetime income. All annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.
If you follow these fundamentals, re-evaluate your portfolio on regular basis, then you'll be on the path to a solid retirement income plan.