The "flooring" approach to retirement income planning

Retirement income planning is a hot topic with the leading edge of the Baby Boom generation now entering retirement, and a total population of this generation numbering about 70 million. Planning for retirement is complicated by several factors including:

Low yields on guaranteed investments

Few have guaranteed pensions

Longer lifespans pressuring retirement savings

Depending on the priorities and risk aversion traits of a retiree, or person approaching retirement, the "flooring" approach to retirement may be an attractive option. In the flooring approach the retiree, with the help of their advisor determines the amount of income they will need each month in retirement to meet their basic needs. In other words, how much will they need to survive and maintain a basic standard of living. Expenses in this category would include food, rent/mortgage, utilities, healthcare costs not covered by Medicare and basic transportation.

This needs assessment should not include expenses for dinner out, vacations, club memberships, concerts, or any other activity or items not needed for basic survival. These expenses would be classified as "wants."

The idea behind deter

mining the monthly expenses necessary for basic survival is to establish the floor of income that you cannot go below. For many, having at least this portion of their total income guaranteed provides great peace of mind, reducing stress and allowing for an easier retirement from a worry standpoint.

Once the floor amount is determined it is appropriate to review the sources of income the person or couple will have in retirement. For most this will include their Social Security Benefit, which can be maximized by working longer (to age 70 maximum) and delaying filing for benefits.

For those whose retired from government or civil service, pension income guaranteed by the federal or a state government is likely available, and usually includes inflation adjustments like Social Security. Some corporations continue to offer pension programs although income from private pensions is not usually inflation adjusted.

By adding up your guaranteed sources of income and comparing the total to the floor amount previously determined, you will find that your guaranteed income is above or at the floor level, or indicates a shortfall exists. In the former situation no further action for flooring may be necessary unless you believe your floor level will rise significantly in the future.

If your floor is significantly higher than your guaranteed income total, then action is necessary to increase guaranteed income up to the floor level if you desire to utilize the flooring approach to planning.

The most common way to increase guaranteed income is through purchase of investments that carry a guarantee. Government bonds or very high quality corporate bonds would be an example. Also, you could consider one of a variety of annuities which carry income benefit guarantees.

Annuity benefits are backed by the insurance company issuing the annuity contract. These guarantees are not as strong as a government backed investment, but the insurance industry has a long, successful track record with few disappointments.

To be sure there are some disadvantages or limitations to purchasing floor income with annuities, but for those who desire to know with certainty how much will be coming in each month they can be a tool to achieve your objective.

Tom Breiter, president of Breiter Capital Management, Inc., a registered investment adviser, can be reached at (941) 778-1900 or by e-mail at tom@breitercapital.com.

This story was originally published March 7, 2016 at 11:36 PM with the headline "The "flooring" approach to retirement income planning ."