For all kinds of activities, it is important to do things in the right order. We mainly talk about treat retirement income planning, but the order retirement income planning is important. To illustrate this point, let’s first look at the simpler example provided by baseball.
Batter Aaron Judge found himself hitting first into the Yankees lineup as he chased the American League home run record. As the first batter, he usually got an extra hit every game, giving him extra chances to hit No. 62.
This part of the plan worked! Judge enjoyed a season for the ages. Then the Yankees lost in the playoffs to a team with a fuller roster.
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Thus, the batting order helped set the home run record (opens in a new tab)but not enough to win the World Series.
Get your order right
Just as every baseball roster is different and can be adjusted to new situations, every baby boomer investor has unique resources and financial needs. A retirement income plan that positions you for overall retirement success makes the most of your savings and, most importantly, adapts to real-time circumstances.
That was my advice to an acquaintance nearing retirement. With today’s higher interest rates and his fairly strong retirement savings, he created a do-it-yourself plan for himself and his wife that would bridge the gap between monthly Social Security payments and his projected budget. He also achieved his goal of bequeathing to his heirs. And all it took was investing in 20-year Treasury bonds. When the bond expired in 20 years, his heirs would be taken care of. My question for him was whether a different plan might be better – with more income, more inheritance, or both.
Of all the things that make up a plan, which do you do first?
Planning retirement income, while not rocket science, is quite complex. For example, here is a list of questions that a comprehensive plan will answer:
- When do you and your spouse apply for Social Security benefits, if you haven’t already?
- What is your budget, taxes included? How will it increase or decrease in the future?
- What are your plans for any inheritance for children or grandchildren?
- What should you do with your 401(k) balances and required minimum distributions? Should you consider converting any rolling IRA savings into a Roth IRA?
- Should you invest your personal savings (after tax) in high-dividend stocks?
- What to do with the equity in your home? Pay off the mortgage or reduce the values?
- What are your other sources of income, such as part-time work, consulting fees, etc. ?
- What about long-term care or extended health insurance coverage?
As you can see, a solid plan will consider many factors – and the order in which you address them is critical. In our view, a plan will start by determining how much income your retirement savings can safely generate over your lifetime, and then what legacy to leave your family.
Go2Income’s Approach and Rationale
Look first at your retirement savings, including your 401(k) and other “qualified” tax-deferred plans, as well as non-qualified savings. Filling out a Go2Income plan with these figures will give you an idea of the income, in addition to social security, that you can reasonably count on. From these savings, you want to get as much income as possible, safe and tax-efficient, with the lowest investment costs.
Our reason for being is simple: you have spent your professional life accumulating money for your retirement, so make the most of it for your retirement. And unlike a pension or social security benefits, you have complete control. This income is the main driver of taxes. It can also be the source of insurance premiums, and after covering your budget, it can add to your legacy.
Now back to my friend’s plan above, which could make (as of November 8, 2022) about $90,000 in income on $2 million in savings by investing conservatively in 20-year Treasury bills and having $2 million at maturity. On the surface, it seems pretty safe.
But what about inflation? Well, TIPS bonds, whose cash flow and value at maturity both adjust for inflation, don’t produce enough current cash flow. What about withdrawals from a rolling IRA account that can exceed 4.5%, requiring you to liquidate some of those Treasury bonds? And what about taxes? Interest on treasury bills is fully taxed at the federal level, while receiving relief at the state level.
My conclusion: Treasury bills are a great item to include in a plan, but perhaps as a single item.
This is how we tackled a risk averse nature
I offered alternatives to this investor. He is quite conservative and wants no more than 35% to be invested in the stock market. We allocated the savings to meet the $90,000 starting income goal and exceed the $2 million bequest goal based on a conservative long-term assumption of 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 equally between fixed income portfolios and growth equity portfolios
- Immediate annuities: $435,000
- Deferred pensions: $250,000
(By the way, these are also the five building blocks of the Go2Income plan.)
So how did this plan work?
While both strategies start at $90,000 per year, Go2Income’s revenue increases by 2% per year, which translates to an advantage of nearly $400,000 over 20 years. After 20 years, the Go2Income plan still has a lifetime annuity worth over $300,000 in addition to $2.1 million in inheritance assuming a 6% stock market return – and $2.7 million dollars assuming an 8% return. It is important to note that only 50% of the first year’s income is taxable. Finally, there was no need to liquidate the $250,000 investment in US Treasury securities.
Income first is our motto
Once you understand the income you can generate in retirement, you are ready to make the decisions that will flow from that knowledge, such as downsizing, how much you can spend on grandchildren, and how long holidays. At the same time, you have perfect control of your taxes.
Realize all this when you:
- Start with a plan that shows how much income your savings can produce.
- Investigate all the products that could help you find an income for life.
- Implement the plan, recognizing that you can — and likely will — make adjustments to your plan along the way.
Getting the right command helps you win in any situation. Who knows? Maybe the World Series would have gone differently if I had given the same advice to the Yankees.
Get your own retirement numbers. Visit Go2Income (opens in a new tab), answer a few simple questions and start building your own retirement plan. This service complements our other services, and you can ask a Go2Specialist to help answer your planning questions. We also have advisors available who can help you with the next steps to refine and then implement your plan.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
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