Developing an income plan for retirement is paramount

For most families, an important goal is to save for what used to be called the “golden years.”

Those golden years have changed during the past three or four decades. Longer life expectancies, the trends of families being more spread out geographically, more active lifestyles and the desire to maintain higher levels of physical fitness are some of the changes compared to previous generations.

Some additional financial factors that have changed include the smaller number of retirees with traditional pension benefits, the desire by some to be philanthropic and the desire to leave legacy gifts to children.

All of those factors place pressure on the income plan for retirees. The life expectancy for those reaching 65 is currently 85, meaning that the typical retirement is going to last 20 years. Half of those 65 year olds will live past 85, many well into their 90s.

Most pre-retirees I talk to don’t have a plan in place to help quantify a reasonable level of spending in retirement, relative to the size of their income producing assets. The challenge: Avoid spending at too high of a rate in early retirement and risking running out of money or facing a drastically reduced lifestyle later on in life.

This is a complex topic with some variables being factual. Social Security income, pension income (if applicable), level of investable assets, rental income and living expenses are generally easy to quantify. Others are effectively guesswork – like rates of return on investments, how long we will live, future inflation rates, etc.

No one can create a retirement income plan with certainty that will occur exactly through life as we envision at the beginning of retirement. But, having a plan and adjusting it as new information and events become known is a far better idea than guessing. The peace of mind resulting from planning is well worth the time and effort expended.

Building a retirement income plan does not require knowing the future. Setting goals for income, lifestyle and legacy help inform us on the level of assets required to reasonably expect the plan will work, using conservative assumptions on the variables we can’t know for sure.

Stress testing the plan for extreme conditions like another financial crisis or increasing inflation helps us plan conservatively to allow for the times when things may not go as well as we hope.

Fortunately, the evolution of technology has brought planning tools to the masses, sometimes for free. Most major brokerage firms and many mutual fund companies have tools and calculators to help get you started.

Financial advisers who specialize in planning usually use more sophisticated (and expensive) software tools to account for more complicated situations, including Social Security planning and legacy gift planning, as well as factoring in those periodic one-time expenses like a world cruise or that dream sports car you’ve had your eye on.

Some say the journey is more fun than arriving at the destination.

Retirement income planning can be both.

This story was originally published May 22, 2017 at 11:40 AM with the headline "Developing an income plan for retirement is paramount."