Megan Jones for August 29th: With Courtney, On Income Planning

By: From Megan Jones, Posted by Ralph Hipp
By: From Megan Jones, Posted by Ralph Hipp

I'm Megan Jones, welcome to Money Matters. Today I’m here with fellow advisor Courtney Cook to discuss Income Planning in retirement. There comes a point when you finally reach retirement and your boss says to you “Here’s the 401k you worked so hard for: good luck!” …and then the paychecks stop. So, how do we turn that savings into an income stream lasts as long as you do?

Courtney: This is one of the most common and intricate questions we help our clients face. The first place to start is with understanding what you actually spend. It is a common misconception that you will reach retirement and only need a portion of your income, maybe 70 or 80%. I haven’t met anyone yet who wants to wake up the first day of retirement with a pay cut! In fact, the first few years of retirement will likely mean new hobbies and travel that actually increase your spending! Start by itemizing your expenses based on one year of spending to get an accurate gage of what your needs will be, including any holidays or annual tax bills. Give our office a call at 877-374-4524for a worksheet to help get you started!

Megan: Once we know what your spending needs look like, then, we’ll take a look at your income source. That might be Social Security, and maybe even a company pension. The question is...How much do you need to take from your investments each month to cover your expenses? Once we know your need, then we identify how to fund the gap: In the families that we serve, that usually involves identifying them as one of three types of families.

First is the pension family, where no matter what happens in the market, you want a predictable income payment. Then we have the market family, who may be more comfortable with risk and counting on the market to deliver the amount of growth needed for income each year. And the third type of family, and what we see most often, which is a hybrid of these two concepts, so maybe a portion of your income needs are predictable and protected from the market, and a portion is in the market for some growth and liquidity with your portfolio.

Courtney: Regardless of which type of strategy is most comfortable for you, it is essential to have a plan. We have heard a lot of interesting approaches and theories for how to fund this gap over our years in working together. One that sticks out in my mind was a lady we both met with who was going to divide her total portfolio value by 20 so it would last her 20 years, and that is how much she would take as income each year. Our biggest question was, what if she lives 21 years?? This is not a plan.

There is also an old rule of thumb that if you are invested in the market 60% bonds and 40% equities you should be able to take 4% of your total portfolio value without running out of money in retirement. But now, according to AARP, it is more like 2.5% based on how the market has been performing the past decade. If you retired in 2008, it would be more like 1-2%. Even if you could make that work, required minimum distributions require you start taking out about 3.6% of your retirement accounts at age 70.5, and then take out more and more each year. This is not a plan. This is a guestimate that depends on a market that you have no control over.

Megan: If you are currently retired, or planning to retire within the next 5 years and want to know how your assets will translate into an income plan for you, call our office today at (877) 374-4524. We’ll talk more about these and other topics this Sunday at 11am on WIBW AM 580, don’t forget to tune in. Thank you for joining us today, I’m Megan Jones and your Money Matters.


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