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3 Tips to Tune Up Your Retirement Income Plan

Mark Zaifman   |    Thu, Jan 19, 2012 @ 10:05 AM

tips to test your retirement income plan

We’re only three weeks into the New Year and hands down, almost every potential client I’ve spoken with so far is concerned about one thing and one thing only - retirement planning. More specifically, they want to know, based on their current financial picture, if they’ll be able to maintain the lifestyle they desire when no longer working for money. That, ladies and gentlemen, pardon the cliché, is the $6 million dollar question on many a boomers mind these days.

Where most of us do really well is on understanding and executing on the accumulation phase, such as saving and investing X amount in your IRAs, 401ks, 403bs, each year. We get that concept. Where things become murky for many people is when you get to the income distribution phase of retirement planning. This is when you need a long-term strategy to fill the gap between your social security and possible pension payments and your lifestyle expenses. To do that, you ask the following questions:

  • How much can you safely withdraw each year from your investment portfolio?
  • What’s the rate of return you’re assuming with your portfolio? 
  • How should you develop your investment strategy?
  • Do you withdraw your cash monthly, quarterly or once a year?
  • Do you withdraw the same amount each year or will it depend on your investment returns?
  • What’s the defensive strategy to preserve your capital if inflation starts to increase rapidly?  

3 Tips to TUNE-UP Your Retirement Plan

1) Challenge Your Assumed Investment Rate of Return

If there’s one area where people most often get into trouble, it’s when they assume too high an annual rate of return on their investments before retirement and when retired.

Instead of going high, even if there’s a good possibility that overall your investment returns come in say at 9%+ by the time you’re retired, keep in mind, retirement planning is at its core about capital preservation, also known as never running out of money before you dieas well as maintaining your purchasing power over time. It’s not about how high your potential return may actually be; on the contrary, it’s about being ultra conservative with your assumptions and assessing how low of a return you can earn pre/post retirement while still being able to reach your financial objectives.

GOAL:  Start by using a 4% average annual return on investment pre and post retirement and go up from there only if needed.


2Challenge the Amount of Investments Available for Income Distribution When Retired

The second area of retirement planning that most often gets people into hot water is calculating the amount of money available for withdrawal when retired. The most common mistake made is forgetting about your major silent partner in retirement. I’m referring to the IRS and your state income tax.

Keep in mind, anywhere from 25-40% of the money not in your Roth IRA is owed to the tax man when you start to withdraw the cash.

GOAL: Come Up with an accurate value of your investments when retired net of taxes and update annually.

3) Challenge All Your Spending and Income Assumptions and Develop a Retirement Plan

I would highly recommend that whatever assumptions you have made about your retirement plans i.e. spending, income, returns, lifestyle, travel, healthcare costs, insurance, taxes, social security, medicare, etc, that you put every one of those assumptions through a stress test.

Most people use overly optimistic projections when planning for retirement. So put those projections through a stress test by first adding 10% to the total of your projected annual retirement expenses and then decrease your projected retirement income by 10% and evaluate results. Repeat this exercise again, this time using 15% instead of 10% and evaluate results.

Bottom line: managing your money when retired requires agility, resilience and the ability to quickly adapt to changing circumstances. Hoping for the best is ok, but don’t forget, you also need to be prepared for the worst as well.

GOAL: Once a year, challenge every assumption you have made about your projected investment returns and retirement income plan. Poke as many holes in your assumptions as possible, then reevaluate and course correct if needed.

And most importantly, invest in yourself and the upcoming prime years of your life by not flying blind into retirement. Instead, plan to win by developing a strategic retirement plan that details step by step, how you’re going to arrive at your desired destination.


Images credit Hub