Part II: Income planning starts with income allocation

As a famous TV sports reporter would say, “Let’s go to the videotape!” When the talking is done, it’s always good to look again at the results to find out who won the race and why they won.

Unfortunately, most “experts” often view the wrong race. In the case of your retirement, many advisors will tell you that in this race against time you win when you hit a magic savings number. When we go to the videotape (or in our case an Excel spreadsheet), we realize that isn’t the correct focus. Instead, we should be asking, “Do I have enough income to retire?”

Income allocation

In Part I of this series on asset allocation, we examined the difference between asset allocation and income allocation. And I shared with you my personal income allocation as well as the thinking behind it.

In this part, I will share my ideas about how to build an income allocation strategy. We’ll start with the largest part of your personal balance sheet, and address what you should do with the savings in your rollover IRA and personal investment accounts. In part III of the series, we’ll quantify the advantages of following this strategy.

What you hear vs. what you need

When working with a financial advisor (either large or small) who concentrates on helping you grow and then spend your savings, you will hear about positive steps to take, such as contributing the maximum to your 401(k), diversifying your investments, and seeking low fees. All good things to do.

Most advisors also talk about asset allocation, probabilities and market averages. They encourage saving but don’t discuss the best ways to convert those savings to steady income. Instead, when advisors give guidance on spending down your savings, they usually mention investing more in fixed income investments, and possibly downsizing your budget to make your savings last longer. With this spend-down strategy, you are taking 100% of the risk, whether from market volatility or from longevity.

Finally, ask your advisor about strategies that incorporate the most obvious “income” vehicle that reduces your risk and your taxes.

Your advisor may not bring it up first. Why? It’s not in their business model. But it should be in yours, as you will see below.

The first word in retirement is income

When I think about retirement planning for Boomers, I have a laser focus on income, whether it is income allocation, income planning, income taxes or income annuities. This seems like common sense to me, since the universal retirement goals include:

  • Maximize Social Security income
  • Minimize taxes on income
  • Allocate a portion of savings to lifetime income
  • Reduce or eliminate income volatility
  • Generate predictable income to cover essential expenses
  • Generate secure income to cover late-in-retirement expenses

The first three steps in income allocation

Income allocation has as its goals to both increase the amount of after-tax income (spendable) and to reduce income volatility (dependable). Here are three steps to take to improve your retirement income:

Step 1

Include income annuities as a new asset class. (See below for definition of an asset class). Sounds reasonable to include an investment that pays you a monthly income, is guaranteed by an insurance company rated “A” or better, starts at a date you select. and continues to you and your spouse for life. I’ve written blogs here and here on the benefits of including income annuities in a retirement portfolio.

Step 2

Treat your rollover IRA accounts differently than your personal (after tax) savings. The tax treatment of each account is so different that it’s almost negligent if your advisor recommends the same allocation for both. One simple example we’ll analyze in Part III is the adoption of very different equity portfolios in the two types of accounts.

Step 3

Manage withdrawals from your rollover IRA savings rather than simply taking the IRS-mandated required minimum distributions. By manage, I mean to adopt an investment strategy/withdrawal formula that reduces your risk and integrates with the income annuity cash flow. Remember, the IRS is just trying to collect some tax dollars and not to create a retirement plan for you.

Crunch the numbers

With these three pieces of income allocation in place, advisors will need to build their own algorithm for figuring out how much and what type of income annuities should be included, what tactics to employ on the investment side, and how to determine the client’s need for income, both early and late in retirement.

While the numerical analysis will be important, the most important benefit may be an asset that’s not recorded on your balance sheet: Peace of mind.

In Part III, I evaluated one specific tactical approach to implementing the strategy, reporting not only the results of a soon to be released study but also with a look at one investor’s choices that helped maximize retirement income.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at, where consumers can explore all types of income annuity options, anonymously and at no cost.

Asset class designation for income annuities

  • An asset class is a group of securities that exhibits similar characteristics, behaves similarly in the marketplace and is subject to the same laws and regulations. The three main asset classes are equities, or stocks; fixed income, or bonds; and cash equivalents, or money market instruments.
  • Does an asset class, have to be traded or have liquidity? An asset’s illiquidity does not speak to its return potential. It only means it may take more time to find a buyer to convert the asset into cash.
  • So, what is the missing asset class? It’s been hiding in plain sight – doing its job for the past 100 years. It’s called an “income annuity.” It’s like a customized pension that you purchase with your own money. Also, according to Treasury rules, income annuities have a fair market value that must be reported to you in certain situations.