A strong retirement income strategy considers many factors, including the retiree’s unique
financial resources and needs. How and when you tackle them is critical.
For all sorts of activities, doing things in the right order matters. We mostly talk about the process of retirement income planning, but the order of retirement income planning is important. To illustrate the point, let’s first look at the simpler example that baseball provides.
Slugger Aaron Judge found himself hitting first in the Yankees lineup while he pursued the American League home run record. As the first hitter up, he usually got an extra at-bat in each game, which gave him additional chances to hit No. 62.
That part of the plan worked! Judge enjoyed a season for the ages. Then the Yankees lost in the playoffs to a team with a more complete lineup.
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So, the batting order helped in setting the home run record(opens in new tab), but not enough to win the World Series.
Get Your Order Right
Just as every baseball lineup is different and can be adjusted for new situations, every Baby Boomer investor has unique financial resources and needs. A plan for retirement income that positions you for overall success in retirement gets the most out of your savings and, importantly, adjusts to real-time circumstances.
That was my advice to an acquaintance who is near retirement. With the current higher interest rates and his fairly robust retirement savings, he created a do-it-yourself plan for him and his wife that would fill the gap between monthly Social Security benefits and his projected budget. It also met his objective for a legacy to his heirs. And all it took was investing in 20-year Treasury bonds. When the bond matured in 20 years, his heirs would be taken care of. My question for him was whether a different plan could be better — with more income, more legacy, or both.
Of All the Things That Make Up a Plan, Which Do You Do First?
Planning for retirement income, while not rocket science, is pretty complex. For example, here’s a list of questions a comprehensive plan will address:
- When do you and your spouse claim Social Security benefits, if you haven’t already?
- What is your budget, including taxes? How will it grow or decline in the future?
- What are your plans for any legacy for kids or grandkids?
- What should you do with your 401(k) balances and required minimum distributions? Should you consider converting any rollover IRA savings to a Roth IRA?
- Should you invest your personal (after-tax) savings in high-dividend stocks?
- What should you do with the equity in your home? Pay down the mortgage or draw down values?
- What are your other sources of income, like part-time work, consulting fees, etc.?
- What about long-term care or expanded health insurance coverage?
As you can see, a strong plan will consider many factors — and the order in which you tackle them is critical. In our view, a plan will start with figuring out how much income your retirement savings can generate safely for your lifetime and then how much legacy to leave for your family.
The Go2Income Approach and Rationale
Look at your retirement savings first, including your 401(k) and other “qualified” plans that defer taxes, as well as non-qualified savings. Filling out a Go2Income Plan with those numbers will give you an idea of how much income, besides Social Security, you can reasonably count on. From these savings, you want to derive as much lifetime, safe and tax-efficient income as possible, with the lowest investment fees.
Our rationale is straightforward — you’ve spent your working life accumulating money for retirement, so get the most income out of it for your retirement. And unlike a pension or Social Security benefits, you’re in total control. This income is the key driver of taxes. It also can be the source of premiums for insurance, and after covering your budget, it can add to your legacy.
Now back to the plan of my friend above, who could achieve (as of Nov. 8, 2022), around $90,000 of income on $2 million in savings by investing conservatively in 20-year Treasuries and have $2 million at maturity. On the surface, it sounds pretty secure.
But what about inflation? Well, TIPS bonds, whose cash flow and maturity value both adjust to inflation, do not produce sufficient current cash flow. What about withdrawals from a rollover IRA account that may exceed 4.5%, requiring that you liquidate some of these Treasury bonds? And what about taxes? Interest on Treasuries is fully taxed at the federal level, while receiving a break at the state level.
My conclusion: Treasury bonds are an excellent component to be included in a plan — but possibly as just one component.
Here’s How We Addressed a Risk-Averse Nature
I proposed some alternatives for this investor. He is quite conservative and wishes that no more than 35% be invested in the stock market. We allocated the savings to meet the $90,000 starting income objective and to exceed the $2 million legacy objective under a conservative long-term assumption as to stock market returns.
- High-dividend portfolio (personal savings): $250,000
- U.S. Treasury bonds (personal savings): $250,000
- Balanced portfolio (rollover IRA): $815,000 split evenly between fixed income and growth equity portfolios
- Immediate annuities: $435,000
- Deferred annuities: $250,000
(By the way, these are also the five building blocks of the Go2Income plan.)
So, how did this plan work out?
While both strategies start at $90,000 per year, the income from Go2Income grows by 2% a year, translating to nearly a $400,000 advantage over 20 years. At the end of 20 years, the Go2Income plan still has a lifetime annuity worth over $300,000 in addition to $2.1 million in legacy assuming a 6% stock market return — and $2.7 million assuming an 8% return. Importantly only 50% of first-year income is taxable. Finally, there was no need to liquidate the $250,000 investment in U.S. Treasury securities.
Income First is Our Motto
After you understand how much income you can generate in retirement, you are ready to make the decisions that will flow from that knowledge, such as whether to downsize, how much you can spend on the grandkids and how long that vacation can last. At the same time, you get a good handle on your taxes.
Achieve all that when you:
- Start with a plan that shows how much income your savings can produce.
- Examine all the products that might help you find lifelong income.
- Implement the plan, recognizing that you can — and probably will — make adjustments to your plan along the way.
Getting the order right helps you win in any situation. Who knows? Maybe the World Series would have turned out differently if I had given the Yankees the same guidance.
Get the numbers for your own retirement. Visit Go2Income(opens in new tab), answer a few simple questions and start working on your own retirement plan. This service is a complement to our other services, and you can ask for a Go2Specialist to help answer your questions on planning. We also have advisers available who can help with the next steps to refine and then implement your plan.