How to Build a Retirement Income Plan

“The most important thing you can do for your retirement is have a plan, specifically a retirement income plan. A plan covers far more than what investments to pick. Investments are the last part of the plan; the icing on the cake. They should come only after you have the main meal menu in place, and the cake baked,” says Dana Anspach, founder and CEO of Sensible Money LLC (and one of MarketWatch’s RetireMentors). To show people what a retirement income plan looks like, Anspach wrote the book “Control Your Retirement Destiny.” Here are five things that Dana covers that are essential to building a retirement income plan that works.

1. Develop a Spending Timeline

Spending changes over time. Accounting for these changes allows you to build a better retirement income plan. Here are some changes you might expect.

• If you retire prior to age 65 – and aren’t covered under a health care plan for retirees – you may pay up to $1,000 a month or more for health insurance until you reach age 65 and begin Medicare.
• You’re likely to spend more on travel and entertainment early in retirement between the ages of 65 and 70.
• If you have a mortgage, it may be paid off at some point during your retirement years.

By projecting these items in a timeline format, you can see each year what projected spending is likely to be. You can also attach an inflation rate to certain items and not others. For example, your mortgage is a fixed amount and won’t go up each year. But you’ll want to count on a slight annual increase in costs for basic living expenses, such as utilities, gas, and groceries. A timeline helps you see how this all works out.

2. Develop an Income Timeline

Next, you should create an income timeline that shows when certain sources of income will start or stop. Social Security may start during one year, a pension may start in a different year, and a spouse may have Social Security benefits starting in another year. Then, at age 72, you’ll have required minimum distributions (RMDs) from retirement accounts, such as 401(k) accounts and IRAs. Create a column for each year and input the annual amount of expected guaranteed income for that year. For those who retire between the ages of 55 and 70, these amounts can vary quite a bit from year-to-year. Once you (and your spouse if you’re married) are both over 70, the income pattern tend to level out.

3. Calculate the Gap

Once you’ve created your spending timeline and income timeline, you can compare the two and calculate the gap between what you have coming in and what you’d like to spend. That gap shows you what you would need to withdraw from savings and investments each year. Add up the expected gap amounts for each year through life expectancy. That gives you a ballpark estimate of the total amount of savings and investments you’ll spend during your retirement years. For example, if I expect I will need to withdraw $30,000 a year for 30 years, that adds up to $900,000. If you have at least $900,000 in savings and investments already, you’re probably in good shape. To account for the rate of return you might earn on your investments, you take the present value of your expected stream of withdrawals. For example, the present value of a $30,000 a year withdrawal for 30 years, assuming investments earn 3% is $588,013. That means if you have $588,013 today – and it can earn 3% a year or more –  it can deliver $30,000 a year of cash flow each year for 30 years.

4. Invest to Fill in the Gap

Once you know your expected withdrawal pattern, you can invest appropriately. If you are delaying the start of Social Security to age 70 – but plan to retire at 65 – you’ll need larger withdrawals during the first five years of retirement. You want those withdrawals secured by safe investment options like bonds, CDs, or fixed annuities. Depending on what type of accounts you have, you may need to go back and adjust your spending timeline to account for taxes. If most of your investments are in retirement accounts, those will all be taxable as you withdraw them. That means for each $4,000 withdrawal from an IRA, you may only have between $2,500 and $3,200 available to spend after taxes.

5. Consider All Options

Retirement is one of the biggest financial decisions you’ll make. It costs more than buying a house or car. Put together various versions of your plan to see what puts you in the most secure financial position. You should also be open-minded and consider other options, such as income annuities and reverse mortgages. Some of these financial products have gotten an unwarranted bad reputation. However, this is just because they were recommended in a situation where they weren’t actually a fit for that person’s individual financial circumstances. But in the right circumstances, these tools can improve your retirement income plan.

An Easy Way to Model Your Retirement Income

The Boldin retirement calculator makes it easy for you to follow these steps for a retirement income plan. After entering some initial data and assessing where you stand now, you can document your income and spending timelines. Then, you can calculate the difference. Next, try out different scenarios for how you can best get the income you need. You can explore options like what happens to your finances overall if you get better investment returns or if you buy an annuity.