Are you ready to begin retirement income planning?
In this post, I’ll present the steps to an innovative retirement income planning process that’s different from the norm. This is the approach that we decided to develop and use in late midlife after being thrown a few curve balls. These curve balls are also known as bear markets and job relocation’s.
We also had been thrown quiet a few financial home runs. These experiences allowed us to rethink commonly accepted wisdom and retirement income planning and create this innovative strategy. It’s based what had worked and had not worked for us financially.
Fortunately, our own retirement income planning from this assessment led us to creating diversified multiple income streams which allowed us to work part time from home starting in late midlife.
In our retirement income planning. We discovered that financial independence is key to retiring and living well. It’s not just about wealth accumulation. What is financial independence, exactly? Financial independence is the ability to live off your money without “working”.
Two Major Methods for Retirement Income Planning
Depending on the amount of wealth you have accumulated, your retirement income planning is probably structured in one of two ways, by having:
Method #1 – You have plenty of income streams from your investments. This income could be from stock dividends, bond interest, real estate or small business. This is the preferred financial independence method for most people. This is especially true for those in the early stages of retirement, or those who have retired early. Those who enjoy the positive mental stimulation from creating income streams from investing or small business do well here, too.
Method #2 – You have plenty of accumulated wealth, usually in investment accounts. The plan is to withdraw to live on without running out of money. This is ideal for people who, in general, have accumulated more than a million dollars, retire late in life, or live very frugally. It’s also for those who do not wish to leave a legacy to family or charity. This is the traditional retirement method.
Ideally, your retirement income planning combines these two methods since this is even more desirable than any one of these methods since it adds an extra layer of financial protection. But let’s be realistic; most people aren’t there yet!
Of course, lifestyle spending and locale are also big factors in your retirement income planning. It costs a lot less to live in Tupelo than it costs to live in Manhattan.
A New Perspective on Your Financial Future
The insight you get from the retirement income planning step below will either give you peace with your money or give you a good kick in the rear. Either way, this simple exercise will motivate you to embrace your financial situation and your actions today.
Your income, spending and investing are all affecting your financial future every single day. Realize that they are taking you closer to financial independence or further away from financial independence.
For many people, the awareness that comes from doing this quick assessment may simply lead to rethinking your investments and your income to foster financial independence. Or you may simply use this retirement income planning tool as a foundation for your own plan.
Spend a few minutes doing these steps every quarter to journey straight toward financial independence based on your findings here.
Two Mindset Shifts Around Retirement Income Planning
Please note that this tool initially assumes two very important things that are outside of traditional thinking about retirement:
1. You want to keep the money in your investment accounts. In other words, you will not be spending the money (which you spent years saving and growing) in your retirement accounts to pay for your lifestyle, at least, not in your younger retirement years. This is method 1 explained above.
The traditional retirement model assumes you begin spending your savings in year one of retirement, or Method 2 above. Unless you have a very high level of wealth, there are several problems with this method.
For one, every time you pull out your wallet you’ll likely feel a twang of fear, worry (or guilt) that you’re spending your hard-earned savings.
Second, a couple of nasty bear markets during retirement can derail your withdrawal plan. No one wants that when they’re just leaving a lifelong steady paycheck! Unfortunately, bear markets are a very high probability based on reliable data if you plan to live off your money for more than about ten years.
The withdrawal method is just too risky to rely on unless you are extremely wealthy, and your investment earnings far surpass your lifestyle spending.
Pretend that instead of depleting your savings, as most retirement income planning does, you can focus on turning that money into a workhorse for you generating monthly income from slightly alternative strategies. You can also enjoy happily enhancing that income with income from your skills, should you choose.
2. Job income is not included in this retirement income planning assessment. This is because we are looking at financial independence, which by definition, excludes employment income. You may have income from your own business, such as online business, consulting or real estate. If so, include that income in the income amount below. This is especially true if you plan to continue this work well into “retirement”. This is the situation we are in, and we enjoy our “work” from home, or anywhere.
This innovative retirement income planning approach is life changing. I still remember the exact day this shift occurred with me over 10 years ago! It changes everything, including the depressing feeling that you need to plan to cut costs in your golden days. Take a few minutes to estimate your numbers below.
The Steps for Our Simple Income Retirement Planning
Avoid perfection as you walk through the steps below. Estimates are definitely the way to go. Estimates are all we ever really have to work with when it comes to our financial future. There is no certainty in employment, in profits, the economy or stock market returns.
In fact, your estimates in the retirement income planning steps below will have more certainty than any of these factors that are less under your control. Let’s get started with you writing in your estimates below in each space provided.
1. Jot down about how much you spend now each month
Remove estimated expenses that will go away once you retire while realizing that these may be offset by the expenses related to enjoying life more once you have the time. Such expenses could include items like travel, golf, grandchildren, a boat, or an RV! Include any debt expenses, such as mortgage.
2. Jot down the total value of your investments
Estimate and keep going no matter what the amount is, or if you are unsure of the exact amount!
3. Jot down the percent income you think you can make from your investments annually
Note: Income comes from dividends, or income paid out from alternative investments, such as REITs or MLPs. As an FYI, stock dividend income has averaged around 2% annually for a long time.
Note: Don’t confuse this with the fact that dividends PLUS long term growth in the stock market over very long time periods is about 10%. This is not income.
This 10% return number you often see is the increase in value in your account when left alone to compound. Here is a video about this important concept:
Whatever your situation, be realistic about your estimated investment income based on your current investments. For most people, this will be stock dividend which is likely around 2%, and bond interest, which is likely about 3 or 4%.
This will be the case unless you or a financial advisor is being strategic and very proactive about getting higher income from your investments. If unsure, 3% is probably a good rough estimate from a stock index dividends and bond index income.
Jot down the % INCOME your investments pay you, or your Estimated % of income
The remaining steps are easier.
4. Multiply the total value of your investments (#2) x the percent (#3) to get estimated monthly income dollar amount from your investments (#3)
(Alternatively, you can check your investment statements for an exact amount.)
Divide this number by 12 for a monthly investment income total.
5. Next, list other monthly income streams, such as social security, consulting (net), net rental income, and total these amounts
6. Add #5 to # 4 for total estimated total income.
7. Subtract your total living expenses (#1) from the total income (#6) and write that number.
Tada!! This will tell you if you have a positive or negative amount of money coming in and out every month simply from your investment income less your living expenses. Be aware that money flow timing may be slightly different, due to dividends being quarterly, or varying monthly income, but this simple approach helps you get a big picture view.
This retirement planning income estimate is pure gold. It tells you how much additional income you’ll want to generate to support your current lifestyle without employment income. This number is your financial independence gap number.
Don’t worry if the number is large. You are way ahead of most people if you have gotten this far because you have taken the time to understand this reality and you have begun to assess what you want and how you can get it!
Opportunities and Threats to This Simple Retirement Income Planning
These fast and simple retirement income planning estimates assume several factors considered in more complex and traditional retirement planning. I want to be realistic and point out several factors, such as inflation and investment appreciations.
These are all covered in an upcoming post. Assuming you don’t want to retire early, other sources of income such as social security would also be factored into more in depth retirement income planning, which I’ll write about soon.