This week Lynn covers some steps to go over in creating a retirement income plan. Join her as she dives deep into each step of the process. At the end of the podcast, she shares exactly what she thinks you need to do next to create and implement a retirement income plan.
Lynn Toomey: Hello, everyone. Welcome to this week’s episode of the Walk the Talk podcast, I’m your host Lynn Toomey. And this week, I am going to be talking about creating a retirement income plan, and I have some steps that I’m going to go over, that I’m going to dive into each step in the process. And at the end of the podcast, I will tell you exactly what I think you need to do next so that you actually create and implement a retirement income plan. So let’s get started.
First off, I have a retirement readiness software platform. It is called Retirement Solved. And one of the very cool things about the software is it has something called an assessment module. And in that assessment module, you can go in and enter all your financial inventory. You go through a number of exercises, a number of questions. The software walks you through. You fill in all of your information, all of your inventory, and then it will give you a single view into everything you’ve got. So you’ll be able to look at your net worth, your cash flow, your income, your expenses, income and expenses currently, income and expenses as projected in the future. And it will identify any gaps, risks, and opportunities that you have based on how you answer those inventory questions and those exercises you go through. So it’s a very powerful retirement income planning tool. It doesn’t tell you how to fill the gaps, but it’s going to identify those gaps so that when you do this, either working with your existing advisor or you work with an advisor in our network, or you decide to do this on your own, it’s going to form the basis. It’s going to give you that data and that view into what you’ve got and what you potentially are missing and it can form the basis of your retirement income plan.
So I like to tell people get started with the software or at the very least, get a spreadsheet. Put all this down, write it down so that you see everything you’ve got and potential gaps, but the software does this for you and I offer a free trial to the software so you can check that out at retirementsolved.io, so www.retirementsolved.io, and you can start a free trial and to your inventory, see what you’ve got, see some potential gaps, and then continue on with the retirement income planning that I’m going to talk about next.
Step two in retirement income planning and retirement planning in general, I want you to get serious about your physical and mental health, because one of the major costs in retirement, and one of the major things that you may need to spend your retirement income on is your health. So rather than spending more than you need to on your healthcare, get healthy, or if you’re already healthy, stay healthy. So get serious about your physical and mental health.
Number three, there’s some preretirement optimization tasks that I’m going to give you. We’re going to talk about those in a second. Number four, I want you to consider your goals and your lifestyle desires. One of the cool things that I didn’t mention in the software is there is an Envision module, which when you have a paid subscription to the software, you can go in and actually go through a number of different exercises that helps you determine what are your goals and your priorities from a lifestyle perspective in retirement. So what do you need that retirement income to fund? And by going through those “Envision exercises”, you’ll be able to come up with some answers.
And I encourage you, if you have a partner or husband that you should do this together, because you definitely want to try to be on the same page as to what your priorities, your objectives and your goals are as you enter into retirement. And that’s what that module in the software is designed to do, very, very important as part of your retirement income plan is to determine those goals and those lifestyle desires. What do you want your income to allow you to do in retirement basically? Next is you must understand and address all the risks of retirement. And I have talked about this in another podcast. I’m going to talk about it again in the future, but there are a number of risks that you must identify and you must address. You’re not going to be able to eliminate most risks, but you can mitigate them to the greatest extent possible.
And again, not to beat a dead horse, but in the software, there’s a whole section on the identification of those risks and how you can overcome them. It’s part of the report that the software provides, which is a GROW report. GROW stands for gaps, risks and opportunities for wealth building. And that is a 40 to 50 page report that will identify those risks that you’re most likely to encounter in your retirement and how you can overcome them. Really powerful stuff.
Next, you want to create as part of your overall plan, an income distribution plan, and the income distribution plan identifies your sources of income and expenses. It addresses any gaps. It will help you refine your retirement portfolio to balance growth and guarantees because many people require that portfolio, which is generally a portfolio from their retirement savings, like a 401(k), but you’ll need that portfolio to become a retirement paycheck for you in retirement, and in order for it to last as long as possible, you need to balance the growth of that profession, so you want your savings and investments to continue to grow in retirement, but at the same time, you need to protect your portfolio from things like market volatility.
So you may need some de-risking of that portfolio, so there’s not so much at risk to the markets. And some people may want some guarantees pulled out of their portfolio, so you may want to create some guaranteed income streams in the form of an annuity. Next, you will want to make sure you understand your fees and your portfolio costs. That is also a critical part of your plan, making sure you know what you’re paying in fees and what your portfolio is costing you. And finally, as part of your income distribution plan, you’ll want to make sure you have tax efficient withdrawal strategy defined, understood, and that you’re committed to it. And by tax efficient, we mean that when you start withdrawing monies for that “retirement paycheck”, you’re doing it in a very efficient tax, a tax efficient manner.
So why pay Uncle Sam more than you have to? There is some very interesting strategic tax efficient tactics that you can deploy so that you pay as little taxes as possible. And this is something that a tax aware retirement advisor is worth his or her weight in gold, because they are going to save you so much in taxes if you are withdrawing from your portfolio efficiently. And then after you’ve created your income distribution plan, you want an income protection plan. So it’s great to optimize your distributions, be tax efficient, have your portfolio allocated properly, but there’s things that can happen to your portfolio, such as a long-term care incident not properly covering for healthcare costs. There are things you can do to protect your income distribution plan, including estate planning.
And then finally in the steps outlined as part of the income planning process is getting reliable guidance or if you’re going to DIY this whole thing, making sure that you get the proper education so that you are equipped to do it yourself. Those are the steps.
Now we’re going to dig into each one of them in a little more time detail for you. But first, I want you to think about how you’re going to live your life now. So retirement income planning, one aspect of it is you’re figuring out what doing for your current self and how are you going to take care of your future self? Well, current self is just as important as future self. And so you don’t want to sacrifice so much of current self and current life enjoyment that you don’t really live. So I believe in a balanced approach. I believe that you should enjoy life. Now you should decide what those priorities are and that’s why the software helps you identify what is your cash flow now? What are your expenses? What are your income sources? How much are you saving for retirement? Is it enough? Can you save more and still live the comfortable retirement that you want now? And what are some things you should be doing now in order to better prepare for future self?
But I like to say, don’t forget to enjoy life now because the future isn’t promised, but today is today and today is the day that you should definitely live and not sacrifice too much. So now I want to talk about preretirement optimization. First in preretirement optimization, you are doing whatever you can to better prepare yourself for retirement. So number one, you want to reduce debt as much as possible, such as credit card debt, number one. Number two, a lot of people choose to double down on their mortgage balances and really try to get their mortgage paid off prior to retirement. There’s some different schools of thought about that, but one of the benefits of having your mortgage paid down so that you have at least 60% equity in your mortgage is that you can at 62, potentially take out a reverse mortgage, which is a strategy in retirement income planning. It provides you a retirement income buffer for emergencies to pay for long-term care and other things.
So there are some benefits for sure for paying down your mortgage balances. There’s some other experts that believe it’s certainly okay to take a mortgage into retirement, but again, the right answer for you, the answer to that is it depends. And it depends on some sophisticated analysis by a retirement advisor.
All right, number two, maximize your contributions to tax deferred plans. Especially if you have company match, you want to make sure you’re maxing that out. The current contribution limits are $19,000 a year with a $6,000 catch-up if you’re over age 50, and for a simple IRA, it’s $13,000 max contribution annually with a $3,000 catch up if you’re 50 and older.
Number three preretirement optimization tactic is tax diversification. So you want to take a look at diversifying to traditional and Roth options, and that is highly dependent again on your situation, but something you do need to talk to someone about or consider if you’re a DIY-er, what is your tax diversification strategy prior to retirement, and is there a way to get more money into Roth or do Roth conversions? So important to check that out.
And then fourth is consider portfolio reallocation, consider the correlation of asset classes in your portfolio. Think about ways that you could start to minimize risk, consider bringing down the allocation of global stocks in your portfolio, those types of things. So definitely consider some portfolio reallocation, and depending on how far away you are from retirement, there’s some different schools of thought on how to do that now.
I’m going to go into four more in the optimization category. The fifth would be to increase your cash flow by reducing your expenses or increasing your income, starting a side hustle, a side gig, part-time job, in addition to your full-time position. And I like to encourage people to use a longevity calculator. We give people access to it in our membership program at Her Retirement, where you can go in and try to scientifically determine your longevity. And we also have another calculator that determines scientifically how predisposed you are to needing long-term care support in retirement. So both of those software programs are available to people that are in the Her Retirement membership program.
You’ll definitely also want to check your 401k allocations. Back in the day when I was in corporate America, I actually just guessed on my allocations. And in hindsight, I wish I had talked to somebody, an investment advisor who really knew what he or she was talking about and could have helped me really optimize my 401k allocations, because it’s your money, it’s your investments, and there are ways to maximize it. And finally, like I said, the number one step of building your income plan is to take an inventory, really identify what you have. Do you have some 401ks that you’ve left behind at previous employers? Do you really know what your current expenses are? Have you determined your number, the retirement number? How much do you need in retirement? And when can you retire? So by taking an inventory, using the software like I suggest, you’ll be able to answer a lot of those questions or at least get on a path to answering those questions.
And once you have those answers, once you have the data, once you have the analysis and the gap analysis, you’re going to feel so much better. Trust me. Okay, so we talked about envisioning your retirement. So I want you to think about what you want for retirement as part of this step in the process. It’s so easy to just go into retirement and not have done this “homework”. It’s very important. You’re going to have 2,000 hours of time in retirement. You need to think about how you want to spend that time. You don’t want to waste any time and by thinking about it in planning and having at least a plan A and then a plan B for how you want to spend your time in retirement, you’re going to really enjoy that time of your life. That’s what it’s all about.
So think about what your retirement looks like. What does it feel like, and how committed are you to making this a reality? And like I said, in the Retirement Solved readiness platform, there is an Envision module that takes you through a number of exercises, no brainer. You just go in and answer the questions. It really gets you thinking, and then it summarizes everything for you, and you’ll have a much clearer idea of what it is you want for your retirement.
A lot of people want financial independence. They want freedom to travel, pursue hobbies. They want to be able to live what they want, maybe have a vacation home, maybe move to their vacation home and sell their current home that they’re living in. Maybe they want an opportunity to provide financially for their children or their grandchildren. Like I said, it’s so important to take the time to determine what you and your spouse want in retirement. Sometimes I like to call it my why. So what is going to be my purpose? What are my hobbies that I’ve always wanted to pursue? Those types of things.
So next step, okay, is determining what amount of money is going to be enough for you. You must have a retirement income plan, no getting around that. And you must have a retirement income projection analysis. The number one financial concern of people of working age at 64% is do I or will I have enough saved for retirement? Yet more than 80% of Baby Boomers haven’t calculated how much they need for retirement. So again, the software is going to help you calculate how much you’re going to need for your retirement. Questions like, do I have enough? Am I saving enough? Many people haven’t determined what they have, what they’ll need, and if they have a gap or how to fill a gap. And that’s where some of what I call multidiscipline retirement strategies, these are retirement optimized strategies that a lot of people don’t know anything about, they come into play. And I’m going to talk about those in next week’s podcast.
So let’s talk about the steps of the retirement income planning process. Number one, you want to calculate your expenses. Number two, you want to calculate your guaranteed income sources, and guaranteed income sources are primarily social security, which makes up about 33% of a retiree’s overall income sources, and pensions, which a very small number of people have pensions these days. So what we find is that most people do have a gap between their projected retirement expenses and their projected retirement income sources. And so they have to figure out how they’re going to fill that gap. So you’ll want to have your plan be able to create an efficient and sustainable retirement paycheck. That’s what it’s all about. We don’t want to run out of money in retirement and be forced to live with our kids. So that’s the whole idea of doing this planning process and doing the projections and using the software.
So creating your retirement budget, so that’s step one. And creating your retirement budget, it’s basically just an estimate of your future expenses. It serves as a roadmap for your savings and your strategies, but nearly 60% of Americans don’t use a budget. So sometimes I like to refer to it as a spending plan because to me, spending plan sounds much less restrictive than a budget. So in the Retirement Solved readiness platform, we have a smarter spending tracking tool. And it allows you to identify all your different expenses by category, and it allows you to identify your income sources. And one of the key components of the spending plan is that there are categories for retirement savings and investments. So you’re going to treat your savings and investments as just another expense prior to retirement. And some people continue to save for retirement after they retire. But anyway, creating that spending plan or budget or whatever you need to call it to trick your mind into doing it is what I want you to do.
Particularly important for projecting for retirement, you might not be doing it in your current preretirement life, but looking forward to retirement, I want you to at least get a general sense for what your retirement expenses might be, because so many people have no idea what they will be. So some of the general guidelines, if you didn’t want to get into like a detailed spending plan, but general guidelines say that you need 60% to 90% of your preretirement income for expenses. So if you’re making $100,000, you need 60,000 to 90,000 in retirement to cover expenses, but you’ll want to think about what expenses might change. Your mortgage may decrease. Healthcare costs may increase. Certainly, caring for children will decrease, if you’re not providing for adult children. You’ll also want to include costs for special retirement pursuits, like travel and hobbies. And again, the smarter spending tracking tool and the Retirement Solved software really helps you define the spending categories and put a number next to these categories. So again, you have that number. You have a really good, a good estimate, if you will, of those retirement expenses.
So you want to cover, account for everything, your fixed expenses, mortgage, credit card payments, utilities, food, your discretionary expenses, the fun expenses I like to call them, like dining out, shopping, travel, and you’ll add these together. And that will be the nut. That will be the nut that you need to plan around and you need then to determine, “Okay, here’s my expenses. What do I need to generate in income in retirement to cover this?” And there are some guidelines for how retirees are spending their money typically in retirement. Housing tends to top the list, followed by food and transportation, which transportation actually is higher probably than some would expect, and then entertainment and then healthcare, clothing, and then typically other.
So I talked about some guaranteed income sources as we move on to determining what our guaranteed income sources are going to be, social security being one, a defined benefit pension income being another. So certainly you can go to the socialsecurity.gov website and identify what your projected social security benefit will be. And of course, if you have a pension, you can research that and find out what your pension will be. But there are some ways to create a guaranteed income source. One is through an annuity. And two, like I mentioned, is through a reverse mortgage or HECM. So before you jump to creating those guaranteed income sources though, you’ll want to understand what potential gap you have. And then potentially, you could purchase an annuity or you could do a reverse mortgage as two ways to close that potential income gap. But there’s some other things you need to consider before jumping to those two solutions.
So what does a complete retirement income plan look like? Well, number one, it’s more than a 401k or an investment strategy. It will protect you, your family and heirs from personal challenges and risks. It will make what you have more efficient and sustainable. It also tries to help you avoid running out of money in retirement. It will ensure to protect you from market downturns, and it should position you to take advantage of market growth and it should allow you to keep more of what you have, i.e. through the tax efficiency strategies we talked about, and I also believe that you should always, always, always have a plan B. So you’ll have your plan A income plan, and you always have your plan B. I believe in plan B for everything in life, because life does tend to throw you those curve balls.
So what are some questions your retirement income plan should answer? One is when you plan to retire, how you want to spend your retirement, how you will support your desired lifestyle. It will define how long your money will last. It will define how you will meet the gap between income and expenses. And it will help you determine if leaving money to heirs is an important outcome for you.
So now I want to talk about options if you do in fact have a gap between your income and your expenses. So there’s a lot of different options, right? There’s working. So some people choose to continue to work into retirement, either full-time or part-time. A lot of people will leave their full-time career and they end up consulting and sometimes even making more money consulting. There are inheritances, although that’s not a guaranteed source. We caution people to count on an inheritance, but certainly an inheritance.
Another way that people close the gap is through rental income. So those are just a few of the ways that people fill the gap. So I hope that this gave you a basic overview of retirement income planning. And again, I do strongly believe in the combination of a tool such as the retirement readiness platform and expertise of a retirement coach like we have at Her Retirement and or retirement advisors who are licensed and registered to provide investment advice. So a coach can coach you through personal finance topics, but they are not licensed to give you investment advice. So when it comes time to allocate your portfolio, they would not be able to do that. They would turn you over to an investment advisor, but certainly outside of investment advice, a coach can take you through this process and keep you accountable, keep you on track, make sure you actually do it right, because so many of us get caught up in our lives. We’re busy and we have every intention of doing this, of figuring this out, but we don’t actually do it. So coach can hold your feet to the fire and make sure you actually do it.
So my next podcast is going to be all about how to create that retirement paycheck from your portfolio, because if you have a gap and let’s say, you think you’re going to work, but you don’t end up working, you think you’re going to get an inheritance, but you don’t get an inheritance, one of the major ways that people fund their gap between their expenses and their guaranteed income sources is their 401k or their retirement savings, whatever type of retirement savings you have, IRAs, Roth, so on and so forth. And what you need to do is you need to take those monies. And let’s say, you’re going to leave your employer. You’re going to retire. You need to figure out how to roll that money over, all that retirement savings investments that you have and create that retirement paycheck.
And you want to create that retirement paycheck that’s going to be efficient and sustainable throughout your life. And there are some very important things that you can do in that process to make what you do have saved and invested as efficient and sustainable as possible. And that’s going to be the subject of my next podcast, but retirement income readiness, I say comes down to this statement, very, very important. And this is going to be a good segue into next week’s podcast so I hope you tune into next week’s, but neither a stock market correction nor rising interest rates will have a noticeable impact on either the amount of income produced by my portfolio or my ability to keep that income growing.
So that is the key. At the end of the day, you want to make sure that if you’re using your retirement savings to create that income, and that is the main part of your retirement income plan is that it is not going to be impacted by the market. Very, very important concept. And next week, we’re going to talk about the concept that most advisors concentrate on managing investments. There’s 300,000 in the industry. Most of them have helped people with their investment portfolio, growing their portfolio. Many of them do not know how to properly plan for retirement so they’re not as well versed in the distribution phase of life as they are in the accumulation phase of life. Most advisors don’t incorporate all the intricate retirement strategies that must be utilized to dramatically increase the probability of a retiree’s success. And I’m super excited to talk to you next week about these strategies and these advisors that are providing these strategies at Her Retirement.
And in this Walk the Talk podcast, I’m all about educating you, making you more aware, helping you get information so that you can make more informed decisions, and so that you can have more informed conversations, but back to step one, make sure you start your retirement income plan by identifying your inventory, identifying what you have, what you’ll need and what your potential gaps are. And then you can move on to working on filling that gap and making sure you are prepared to live as joyful and peaceful retirement doing what you want to do, because you’ve defined your goals and your priorities upfront, and you can live the retirement you’ve imagined. So we are all about knowing more and having more. We believe education is the way to do that. And as I like to say, I believe that everyone should commit to getting her done. So I hope you’ve enjoyed this podcast. I’ve hope I’ve given you some insights into retirement income planning, and certainly giving you some ways to access the retirement readiness software tool that I’ve just launched. And if you have any questions, don’t hesitate to reach out to me at lynnt@herretirement.com. And thank you for listening and we’ll talk to you next week. Have a good day.