Create a Retirement Income Plan in 4 Easy Steps

retirement planning

Retirement income planning is a multistep process used to ensure your retirement is comfortable, secure, and enjoyable. 

While there is an awareness of the importance in planning for retirement, few Americans do.

A 2019 study found that 64% of workers surveyed had less than $10,000 saved toward retirement. 

What’s worse is that nearly 40% of workers surveyed age 55 and older reported no retirement savings at all.

Part of the challenge is the fact that, more than ever, the task of retirement planning is falling on individuals. 

Few employees can depend on an employer-provided defined-benefit pension. And the future of Social Security is unknown. 

Additionally, investing in defined-contribution plans, such as 401(k)s, means that managing the investments is on you. It is not your employer’s responsibility.

The challenge of building a solid retirement income plan can be met by addressing these four questions.

No matter what age you are or where you are in the process, getting clear on your answers will propel you toward a secure future.   


#1 Who Are You in Retirement?

Planning for retirement starts with assessing your retirement goals and figuring out a timeline to meet them. 

Since retirees are no longer at work for 8 or more hours a day, there is more time and opportunity to spend money. 

Increased spending in the future means needing additional savings today. 

Having accurate retirement income goals helps in the planning process.

While it would be great to have a crystal ball to foresee the future, start by identifying who you are in retirement: 

  • Will you travel? 
  • Start a business or side hustle? 
  • Be a caregiver? 
  • Take up a new hobby or spend more time with your family? 

Based on your answer, you can begin to plan the retirement income needed to support your lifestyle during retirement. 

If you have trouble with this exercise, try this…

Assume it’s been 3 years since you retired.

What 3 things occurred in that time frame that let you know that you had the perfect retirement income plan? 

Write it out. Get creative. Dream big. This is, after all, your future we’re talking about! 

Planning for Travel

Many people dream of traveling once they retire. One potential obstacle that stands in the way of that dream is the cost. 

The international travel agency network Virtuoso reports that the average retiree spends $11,077 a year on travel.

Yet in 2018, some 26 million senior Americans had less than $25,601 in yearly income from all sources, according to the Pension Rights Center. 

This doesn’t leave a lot of room to pay for trips. 

If your goal in retirement is to travel, where do you want to travel? How frequently do you want to travel? 

Answering these questions will help you figure out how much you’ll need to fulfill your travel dreams. 

Ask yourself if you have the cash flow to cover your normal cost of living. Then, add in the cost of traveling. If you won’t have the money to cover basic living and travel, then you need to get a plan in place. 

Planning for Hobbies or Bucket List Activities 

Do you want to learn a new skill, go back to school, or take up golfing or tennis? 

Whatever it is, you need your retirement income to fund these activities. 

Write out a list of everything you’d like to do, and then research the real cost of doing it. 

Planning for Caregiving

If caregiving is a possibility during retirement, planning for it is very important. 

Caregiving responsibilities have a major impact on retirement income decisions. 

Care-related time demands should be considered, as well as financial needs due to care recipients’ illness or disability. 

Without a plan, caregiving can have long-lasting economic ramifications. It is important to know that early retirement or pre-retirement work disruptions are likely to decrease retirement benefits. 

This may affect non-married caregivers more who cannot rely on spousal Social Security benefits, but early retirement also will reduce benefits based on spousal Social Security.

Some ways to plan retirement income with caregiving needs in mind include…

  • Creating a budget for you and your loved one.
  • Weighing out the pros and cons before leaving your job or cutting back hours.
  • Maximizing your loved one’s resources like Medicare or reversing a mortgage.
  • Taking advantage of pretax savings like opening a health savings account (HSA).

Planning for a Side Hustle

According to a Merrill Lynch study, households aged 50 to 55 have only saved $124,831. 

That’s about one-fifth of the amount recommended to survive retirement. 

Taking part in the gig economy or starting a side business, however, offers a solution for added retirement income.

Selecting the right freelance position or part-time side hustle that best suits you means you can increase the income needed to live comfortably. 

Paying off expenses and debt is foremost. 

Identify the weak spots in your finances and consider how a side hustle could supplement your lifestyle.

One thing to consider is how a side hustle or new business will impact your income in terms of Social Security benefits.

If you reach the full retirement age of 66 and 2 months in 2020, the limit on your earnings for the months beforehand is $48,600. Once you begin drawing Social Security, you can’t earn more than $18,240 a year without reducing your annual benefits. 

Make sure the numbers make sense. The goal is to pay off remaining debts and rely less on your 401(k) and other retirement accounts for everyday living. 

#2 How Much Income Will You Need?

Now that you know who you will be in retirement, it’s time to add it all up and figure out how much retirement income you’ll need. 

To find this out, you need to add up… 

  • Fixed expenses like your mortgage and car payments. 
  • Expenses that fluctuate like healthcare, utilities, and credit card payments. 
  • Recreational expenses like travel, leisure, etc. 

Many people believe that after retirement, their annual spending will amount to only 70% to 80% of what they spent during working years.  

Such an assumption is often proved to be unrealistic, especially if the mortgage has not been paid off or if unforeseen medical expenses occur. 

Also, retirees sometimes get overeager spending their first years splurging on travel or other bucket list goals.

But the cost of living is increasing yearly, especially with healthcare expenses. And, people are living longer.  

For these reasons, annual spending is often closer to 100% of what people spent pre-retirement.

In order for retirees to thrive, they will need to study their expenses, save, and invest accordingly.

A huge factor in the longevity of your retirement portfolio is your withdrawal rate. 

Your longevity needs to be considered when planning for retirement, so you don’t outlast your savings.

Having an accurate estimate of what your expenses will be in retirement is vital because it will affect how much you withdraw each year and how you invest your account. 

Once you have this figure in mind, you then need to look at the types of retirement accounts that can help you raise the money to fund your future. 

As you save that money, you have to invest it to enable it to grow.

#3 Do You Understand the Difference between Guaranteed Assets and Maybe Assets?

A big challenge in creating a comprehensive retirement income plan is balancing realistic return expectations and a desired standard of living. 

Consider all the resources your retirement income will come from. 

Specifically, what income will come from Guaranteed assets vs Maybe assets?

Because this is really important in planning a retirement income that lets you live a dream retirement, let’s take a moment to define each.

Guaranteed assets are those with a primary purpose to protect your principal. A secondary purpose may be to provide interest income. These include…

  • Savings Accounts
  • CDs
  • U.S. Treasuries 
  • Money Markets
  • Fixed Annuities 
  • Social Security 
  • Pension Income 

Maybe assets
 are designed for growth in retirement, but also are more at risk in retirement. These include…

  • Stocks
  • 401ks and IRAs
  • Commodities such as gold and silver 
  • Real Estate Trusts
  • Variable Annuities

Now that you have separated these assets, it’s time to determine if you have enough income to support your retirement expenses and needs from your Guaranteed assets. 

Is there enough income from the Guaranteed assets to meet your monthly expenses and retirement lifestyle? 

If so, you can feel certain that your expenses will be comfortably met in retirement without any risk.

If not, how much should be moved from the Maybe assets to the Guaranteed so you can live the retirement lifestyle you want? 

#4 What Is Your “Dosage” of Risk?

Step 4 of creating your retirement income plan is to figure out your dosage of risk with your Maybe assets in order to offset rising healthcare costs and inflation. 

Your returns need to outpace inflation so you can maintain your purchasing power during retirement. But, remember, there is more risk involved with Maybe assets. 

An inflation rate of 3% seems small. However, it will erode the value of your savings by 50% over approximately 24 years. 

Yearly, it doesn’t seem like much, but given enough time, it has a huge impact. 

To prepare yourself for increased costs, you need to make sure that you are comfortable with the risks being taken in your portfolio. 

You must find the appropriate dosage of risk that you can tolerate.  

A good way to do this is to assess the level of pain you can tolerate based on specific instances in current and past market cycles. 

Take a moment to answer the following questions: 

  • What level of pain did you endure the last time you lost money in your retirement accounts? 
  • What level of pain did you endure the last time you had to sell one of your investments to meet a short-term financial need?
  •  What level of pain did you endure the last time the stock market fell 5%, 10%, or 20%?  

Honestly answering these questions will help you determine your risk tolerance. 

If you realize you’re behind on your savings, it may be tempting to ramp up your portfolio risk in attempts to produce above-average returns. 

Some additional risk may be appropriate depending on your preferences and tolerance, but taking on too much risk can be dangerous.

This strategy may be successful on occasion, but it often delivers mixed results. 

Taking a high-risk strategy can sometimes put investors in a worse situation by committing to riskier assets at the wrong time.

Check Out Our Guide + Workbook

How to Create the Retirement Income Plan That Meets Your Needs…NOT Your Broker’s


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