You Spend Income, Not Assets
Many retirees approach retirement with a healthy mix of unease and excitement. One of the most frequent questions I am asked is, “Andrew, what will be different when I retire on Friday?”
Financially, one of the big changes in retirement: You have been used to 40 years of paychecks, and on Friday those paychecks dry up. Therefore, it can be essential you remember that you do not spend assets in retirement, you spend income. The truth is, if I had the choice between an extra $60,000 a year for life and $1,000,000 in cash, I would take the $60,000 in a heartbeat. It can be a lot of work to create a sustainable, inflation-protected income for rest of your life.
How can you help your family transition?
1. Determine your GAP – Start with the end in mind, so you know how much you need. Many families I have sat down with are only a year from retirement, yet they don’t know how much they really need in monthly income once they retire. Next, we need to inventory all your guaranteed income sources, such as Social Security and pensions. If you are married, you need to keep in mind what these amounts would be if one of you were to pass first. Lastly, we need to figure out the gap between these two numbers – what you are scheduled to receive and what you still need. Once we arrive at this number, I ask each client how much of their retirement income they want to be guaranteed. Lou Ann, they all say 100%.
2. Retirement Income Plan –One way you can begin building an income plan is by designing three distinctively separate buckets. Each bucket should have its own objective. The first bucket should contain a guaranteed income for years 1 to 5 of retirement. This can be so critical, because when the market is fluctuating, you don’t have to check your statement daily to see what your next retirement check will be. Bucket #2 contains your future income from years 5 to 10. When you have the freedom to grow funds for a 5-year period, you can sacrifice liquidity for the opportunity for a better return. Lastly, you have an income bucket for years 10 and beyond. This should be invested in growth-oriented vehicles to outpace inflation. Consider real estate or securities for these funds. Do not make the grave mistake of retaining all your investments in one melting pot. Comingling your entire nest egg could be a recipe for a complicated retirement.
3. Legacy…Or, Sorry Kids – One of the pivotal questions that a couple needs to decide for their retirement is this: On a scale from 1 to 10, how important is it for you and your spouse to leave money behind for your beneficiaries? If you and your spouse reflect on this question, it may empower you with permission to spend down your assets. While it’s hard for long-time savers to have their last check bounce, at the least if your home is paid for, your children should receive some equity from this asset.
Grocery stores do not accept assets; they only accept income. Every retirement plan should prioritize income that both spouses cannot outlive. I’ll tell you a little secret about where the market could be headed over the next 10 years. I don’t tell everyone this. It’s going to be much like it’s always been – up and down at various intervals. I share this joke with you because your income should not be at the mercy of market swings. You don’t want to have to bargain with Mr. Market (who could be manic depressive) every year during retirement.
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