Linda P. EricksonLinda P. Erickson, CFP®, is the president of Erickson Advisors and a registered principal offering securities through Cetera Advisor Networks, LLC, 336-274-9403 lindae@ericksonadvisors.net.
Do you have a GPS in your car? You just hop in the car, punch in the destination, and a lovely voice leads you to where you want to go.
If only retirement income planning were as easy.
I often ask prospective clients, “What have you done in order to double your retirement income over the rest of your life?” After a stunned silence, most reply that they will not be able to double their income in retirement. And yet, at a three percent inflation rate, your $50,000 life expense cost will cost you over $120,000 by the time you no longer have to worry about such costs. If you have retired early, your expenses will likely triple by the time you reach 95. WOW!
Faced with that challenge, I believe the answer to the question, “Do I need really need to make a Retirement Income Plan?” is a resounding ‘YES.’
So… what are the steps to take in constructing a Retirement Income Plan?
- Know what you want to spend, and what you need to spend. You may have to cut back on those wants in some years.
- Know what your current and future income sources are, like Social Security and any Pension that you will receive. Social Security may keep up with inflation, but your pension income may not increase over time. Remember, some of your Social Security income may be taxed, depending on your other taxable income level.
- Add up your financial asset base. What is a financial asset base? It is those assets, bank accounts, IRA’s, stock, bond and mutual fund accounts – all those potential sources of additional income. But this is where it gets tricky.
- Determine a safe withdrawal rate from your asset base.
What is a safe withdrawal rate from that asset base? As with most things in life, it depends. It depends on where it is. Will it cost you tax dollars to get it out? How liquid is it? Will you have to sell an asset in a market that is not cooperating? Think about the sale of a home or an investment property in the past year or two. How easy was it to convert that asset to cash for retirement income?
Mix all of these questions, add in all of those retirement income wants, reduce by some small amount of fear that the money might really run out, and what do you have? You have no idea what a safe “rule of thumb” withdrawal rate is for you.
Crafting a Retirement Income Plan is very personal and specific to you. This plan must address specific personal goals of housing needs, recreation needs, charitable giving goals, as well as effective tax planning in the withdrawal strategy from both taxable and non-taxable accounts. In today’s complicated world, it may be good planning to work with a competent, experienced and credentialed professional to determine what account, what amount, and what the timing of the withdrawals should be.