Today, we delve into the intricate world of retirement income planning—a critical aspect of financial strategy aimed at ensuring a comfortable and sustainable retirement lifestyle. Because every person is different and has different assets, risks, goals, desire, and risk tolerance, there isn’t a one-size-fits-all solution. There are several approaches to consider when crafting an effective retirement income plan.

Systematic Withdrawal Approach

The systematic withdrawal approach remains the most widely adopted strategy in retirement income planning. Its primary goal is to generate consistent income throughout retirement by systematically withdrawing a predetermined percentage from a diversified investment portfolio. Typically, a safe withdrawal rate, often around 4% annually, is established to sustain retirement needs while considering tax implications on income-generating investments.

Bucket Approach

Another popular strategy is the bucket approach, also known as time-based segmentation or age-banded approach. This method involves dividing investments into distinct "buckets," each designated for specific time periods in retirement. The first bucket, covering early retirement years (typically ages 60-70), prioritizes secure assets like cash and bonds to meet immediate income needs. As retirees move into the second and third buckets (ages 70-80 and 80+), investments may shift towards a blend of conservative (often bonds) and growth-oriented assets (usually stocks to balance growth potential with longevity of income. The idea is that the second bucket will have longer time to grow than the first, but not as long as the last. The final bucket is most aggressive since it is used last. We find in our practice that the Bucket Approach is a great way to start to wrap your ahead around transitioning into taking income and therefore is a useful though experiment. In practice, if you follow it strictly, it can become a bit unwieldy. For example, if two spouses have a joint investment account plus each has a pre-tax Traditional IRA and a Roth IRA and each one needs to be split into three buckets, you could end up with nine accounts!

Flooring Approach

The flooring approach offers a structured method where retirement expenses are categorized into essential and discretionary categories. Essential expenses, crucial for maintaining a baseline standard of living, are matched with guaranteed income sources like pensions, social security or income annuities. Meanwhile, discretionary expenses, which can afford more risk, are funded through a mix of medium to high-risk investments. This method provides a clear framework for retirees to manage their financial obligations while potentially maximizing growth opportunities for non-essential spending. Interested in more details? Look up Wade Pfau’s research on generating guaranteed income with tools such as income annuities or reverse mortgages and combining that with the Systematic Withdrawal approach to give you some of the best of both worlds.

Choosing the Right Approach

Selecting the appropriate retirement income strategy depends on various factors, including risk tolerance, investment goals, and personal preferences. It's essential for retirees and their financial advisors to assess these factors comprehensively before determining which approach—or combination of approaches—best aligns with their long-term financial objectives. We’ve found over the years that using a mix of these approaches can be quite helpful.

For example, someone about to retire could downsize to a home where their social security will cover the property taxes, medical insurance and expenses, and basic food (Flooring Approach). They could then set aside cash to use for the first year or two of retirement (Bucket Approach), and then invest the rest into a moderate to moderately aggressive portfolio (Bucket Approach) and schedule recurring monthly withdraws from that portfolio (Systematic Withdrawal Approach).

Conclusion

In conclusion, effective retirement income planning is about more than just generating income—it's about creating a sustainable financial framework that supports your desired lifestyle throughout retirement. Whether you opt for the systematic withdrawal approach, bucket strategy, flooring method, or a customized blend thereof, thoughtful planning and periodic review are crucial to adapting to changing financial landscapes and personal circumstances.

Thank you for exploring these retirement income strategies with me. Stay tuned for more insights and guidance on navigating the complexities of financial planning and achieving your retirement goals.