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Investing for Life Part II—Creating Income

Investing for Life Part II—Creating Income

By James R. Cook, CFP®
Senior Manager for Large Employers

Last month in part one of this two-part series we focused on the first major financial stage in most people’s lives, the Accumulation Phase. You will recall that this phase occurs during your working years when you are earning income and saving and investing some of your earnings. Your goal is to accumulate enough assets to provide income during your retirement years.

This second article focuses on the Spending Phase and the decisions that you need to make to create a stream of income that can support your lifestyle in retirement.

What are my sources of income?

Let’s start by looking at the different sources of income that you can expect to be able draw upon in retirement. For many years, financial planners talked about retirement income as being a three-legged stool, supported by three income sources: Social Security, Employer Pension and Personal Assets. Increasingly though, many planners are beginning to think that a fourth leg plays a significant part of many individual’s plans, and that leg is Work.

Let’s look at each of the legs and some important considerations for each.

Social Security

Your potential income from Social Security is based upon your earning history, your projected benefit at your full Social Security age, and the age at which you actually begin to draw your benefit. The longer you work and/or delay drawing your benefit, the larger your benefit is likely to be.

  • When can I begin drawing benefits? The earliest that you can draw benefits is age 62, the latest is age 70. For individuals born in 1943 and later, the age of your full benefit is based on the year you were born and is between age 66 and 67. (See the SSA website here to find your full benefit age).
  • When should I start my benefits? There are a number of factors to consider, but in general, delaying the start of benefits will increase your monthly benefits. Every year you delay past your full retirement age (FRA), your benefit generally increases by 8% a year. If you start drawing your benefit before your FRA and you are still working, there are limits on how much you can earn before your Social Security benefit payments are reduced.
  • What are the benefits to my spouse? Social Security for married couples has significant benefits. If you both work until you reach your FRA, the spouse with the lower benefit can claim benefits equal to his or her own benefit, or 50% of the value of the higher earning spouse’s benefit, whichever is greater. When one of you dies, the survivor receives a benefit that is substantially equal to the value of the higher benefit.
  • How much of my pre-retirement income can I expect Social Security to replace? According to the Social Security Administration, individuals with average earnings can expect their benefit to replace about 40 percent of their income. To receive a current estimate of your future benefits, you may register here on the SSA website to receive a current projection.

Employer Retirement Plan

For many, this will mean a retirement plan with a cash balance in a 401(k) or 403(b) retirement plan, although there are other less common types of employer sponsored plans. Savings from an employer sponsored retirement plan is likely to be the largest invested asset most people have outside of the ownership interest in their personal home.

  • How can I receive my income when I retire? Remember, at this stage of your financial life, it is not so much about how big your pot of money is, but how you can create a safe and sustainable stream of income to support your lifestyle. Do you have the option of converting some of the income to an annuity or other guaranteed payment stream, or are you only allowed to take distributions from the balance?
  • What options does my spouse’s plan offer? It is important to consider the income options on your spouse’s retirement plans in addition to your own. We commonly think of retirement plans as belonging to individuals, because of the tax rules associated with them. But for couples, it is really important when planning for retirement to consider all plans together. This allows the creation of a unified income strategy that intelligently makes the most of benefits while you are both alive, and builds in a safe income for the survivor.

Personal Assets

This is a rather broad category, but it can include other cash value savings and investments that you have outside of your employer sponsored plan and investments, such as business interests, real-estate, or anything else of value that you can potentially convert to cash to provide income in retirement.

  • What are the tax implications of selling these investment? Minimizing your tax liability is a critical part of creating a retirement income plan because every dollar you pay in taxes, is one less dollar you can spend. Many people have a combination of assets with a variety of tax situations. You may have a traditional IRA, that would be treated as regular income, a Roth plan that is not taxable and a brokerage or other investment account that could be subject to capital gains tax rules. Knowing when to use which asset, or the order to use them for the best benefit, are great reasons to seek professional advice.
  • What about the equity in my home? Many people make it to retirement with significant equity in their home. If you have made it to retirement with your home paid off, that could lead to the benefits of peace of mind and a significantly lower cash flow need from not having to pay a mortgage. It also means that you have a very high percentage of your assets that are not readily available. Maintaining a line of credit on your home, though not appropriate for everybody, can minimize the amount of cash that you have to keep on hand for emergencies, or significant, unplanned expenses. Reverse mortgages, while complex, can also play an important role in some individual’s income plan. Contact a financial planner to see if one of these options makes sense for you.


You may ask, “If I’m working, how can I be retired?” For some individuals, the goal is not necessarily to stop working altogether, rather it may be to downsize their work life. Downsizing your work life can mean exiting a high stress job to something more manageable, working part-time, or even engaging in employment wholly different from your professional career, possibly in work that is aligned with a hobby or other personal interest. For many, it may become the next chapter. Adding this fourth leg does not mean that you plan to work the rest of your life; however, being open to work as an income source for part of your retirement—usually the early years—may allow you to delay using some of your other sources, thus allowing them to continue to gain value.

How much money will I need?

Now that you have a good idea of the sources that you can tap for income, the most important question that you need to answer is How much income will I need in retirement? You may have heard a lot of rules of thumb as answers to this question…70% or 80% of your preretirement income. The reality is that the only way to determine this important number is to track your expenses and make a spending plan. Note that we did not say make a budget. There’s a difference.

As you start retirement, you need a spending plan that includes a budget, but your spending plan is more comprehensive than a budget.

Why? Because for many people, retirement involves the desire for a significant change in lifestyle, with different patterns of spending. Being realistic and thorough about this change is more than writing a budget.

How do I create a spending plan?

Begin by creating a four-column table like the example below

  • In column one, list any significant changes to your lifestyle that you intend to make in the first five years of retirement that have an associated cost.
  • In column two, note whether this is going to be an ongoing or one-time expense.
  • In column three, note if it is a discretionary expense, or a fixed expense.
  • Finally, in column four, estimate the amount of the expense.

Your expenses may fluctuate through several retirement stages:

During the first stage of retirement, your expenses may be higher if you plan to relocate, travel, pursue hobbies, or other activities that cost money.

In the second stage of retirement, discretionary spending on activities may decrease, because you may not continue to participate in as many activities.

Expenses in the third stage are largely dependent upon personal health. If your health is good and you can continue to live independently without costly support services and medical expenses, your expenses may be very low. Conversely, if your later years are marked by the need for support services and significant medical care, your expenses may be higher.

Next, begin to track your actual expenses for a period of three-to-six months, differentiating between required and discretionary spending. If your plan involves a move to a new home, you will need to estimate your new expenses. Once you believe you have a solid feel for your spending, use the figures to estimate your total annual required spending. (Remember to capture things like insurance and property taxes that may be paid once or twice a year).

  • Add in any ongoing, fixed expenses from the first worksheet. You will now have an estimate of the base income you will need in retirement.

Last, take the discretionary spending from the first worksheet and add it to the discretionary spending from your expense tracking. Separate one-time from ongoing expenses.

How do I create an income plan?

The first goal is to create an income plan that will, at a minimum, provide a safe and secure income to meet your nondiscretionary income. This plan should allow for inflation over your lifetime, and take as little risk as possible, so that the likelihood of you either outliving the funds, or falling behind to inflation is as close to zero as possible.

Let’s look at the four income sources and see how they work as part of the plan. You can create a worksheet like the illustration to track your progress toward meeting your income needs.

  • Social Security: This is a good place to start because it is one of the most secure sources of income. It is adjusted for inflation and is backed by the U.S. government (benefit formulas can be changed by legislative action). Review your latest benefit statement. You may also register online to access one online. Take the estimated benefit for the year you are planning to retire—and your spouse, if applicable—and calculate the amount you will receive annually.
  • Employer Pension: Enter any pension or annuity amounts that you may be able to claim as a part of your employer retirement plan. If you have a plan that does not offer a pension or annuity benefit, you can purchase an annuity through another financial institution.
  • Personal Assets: This is a bit more complex as it is dependent upon the types of assets you hold. If you have invested assets that you plan to include as a part of your annual income plan, enter that number on your worksheet. (You may choose to seek assistance from a Certified Financial Planner™ professional to help you evaluate your options.)
  • Work: If you plan to work for a period of time in retirement, enter the annual amount that you believe you will earn on the worksheet.

If it the total suggests that you will be short on income, there are things you can do:

  • Delay retirement: Delaying retirement by just a couple of years can have a profound impact on your income sources. When you delay retirement, your assets have the potential to increase, if market conditions are positive. Most forms of guaranteed payouts like annuities and Social Security increase, the longer you delay.
  • Consider work: If work in retirement is not a part of your original plan, consider including some form of part time work that can close your income gap.
  • Review your income needs: If your resources do not safely cover your projected income needs, are there places that you can reduce your projected spending? For most individuals, costs associated with where you live is the single biggest part of your budget. Can you downsize to a smaller, more economical home? Relocate to a community with a lower cost of living and lower taxes?

If your income sources appear to be able to support your required spending, your next steps are to look at the discretionary portion of your spending plan. Start with one-time fixed expenses and then evaluate the total cost of expenses that are ongoing. Start with your ongoing discretionary expenses. Evaluate the cost of funding them for five years. Does your portfolio support those costs plus your one-time discretionary expenses?


This article offers a high-level overview of things to consider as you approach retirement, and outlines a few options for creating a safe income stream that may need to last thirty or more years.

We understand that your situation is unique, and that all the suggestions outlined here may not be appropriate for you. Working with a MMBB Certified Financial Planner™ professional is a great way to get support and guidance as you plan for your future. Give us a call at 800.986.6222 if you would like to speak with a planner.