This three-step strategy is so simple, so effective, and makes so much sense that you will wonder why you never thought of retirement income planning this way before.
I call it my Bottom Line Retirement Income Strategy to producing reliable retirement income — for life.
Step One: Determine your monthly income need in retirement. For some people this is the hardest part.
Generally, I recommend people add up their basic living expenses: transportation, utilities and other household expenses, food and entertainment, basic medical expenses, etc. Be sure to take in to consideration insurance premiums, property taxes and other expenses that come up throughout the year, but not necessarily every month.
If you want to be conservative, add in an assumed amount each month for those unexpected expenses that always seem to pop up.
Don’t be overly stingy. Most people spend more in retirement than they expect.
For purposes of this blog post, let’s assume your monthly income need is $5,000.
Step Two: Add up your various sources of guaranteed income – social security, pensions, rental income, etc.
According to the Social Security Administration, the average retired worker receives $1,343 a month in social security benefits. If you are married, add another $692 – on average.
Obviously, these numbers are just examples. To get a more accurate estimate of your benefit, click here.
Don’t forget about any pension benefits you may be entitled to as well. If you work for a government entity or an employer that pays a guaranteed pension at retirement, include that among your sources of income.
For example, let’s say your guaranteed income sources tally up to $2,785 (the social security amounts above + $750 in hypothetical pension benefits)
Subtract that amount from the number you calculated in Step One and you should get a difference of $2,215 ($5,000 income need less $2,785 guaranteed income sources).
This is your “bottom line” – the rock bottom number you need to come up with each month – regardless of what happens in the stock market or the economy – to supplement social security and other guaranteed income sources in order to meet your monthly income needs.
Step Three: Decide how you are going to meet your bottom line.
In the example above, you need to come up with $2,215 every month ($26,500 per year) to meet your income needs in retirement.
Most investment experts estimate that you can spend down your retirement assets at a rate of 3% – 4% per year and have a very high likelihood that your savings will last the rest of your life – even after accounting for inflation.
Should this extra income come from annuity payments? Stock dividends? Interest on bonds or CDs? Or perhaps a combination of the above?
This is where some careful planning comes in handy. The best solution for you will depend on how much you have saved for retirement, your risk tolerance, investment experience and other factors.
In my next post I will tell you how use my Bottom Line Retirement Income Strategy to determine exactly how much money you should set aside in conservative, safe investments and how much you can afford to risk in the stock market.