In part 1 of our columns on having a written retirement income plan we outlined a number of the tools that can be used as part of the planning process. Specific tools can incorporate everything from stocks, bonds, mutual funds, annuities, banking products, etc. We also highlighted the fact to focus on what is really important in life. The tools are just the vehicles to help an investor reach the experiences he or she wants in life. We stressed the importance of creating a written retirement income plan as the first step. In today’s column we are now going to outline the steps to create that plan.
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Mark and I recently sat down with Dan Couture. He is what we would consider a business coach and a national speaker on the matter of retirement income. A few phrases he said stood out to us. First, “there is no retirement without income.” And “to stay retired you need to have reliable and sustainable income.” What he said reinforces the important message that we promote all of the time, all investment decisions need to be made based upon current and future cash flow.
The challenge numerous people face is those are not often the messages investors hear and in turn can focus on. Here are a few of the financial headlines this week and judge for yourself what the headlines are encouraging investors to do. “The only 5 investments you need to own” or “Big money is moving to cash and so should you.” Reading each of these headlines may damage an investor’s confidence in their current plan leading them to want to change what they are currently doing. But, is this a smart idea? Probably not, chasing results and headline news can be a costly mistake.
Mull it over for a minute, what are the majority of people saving and investing for? In the majority of cases the goal is to save up sufficient assets to generate enough income to fund a goal like retirement. If income is the goal, then the headlines of today or the short term up’s and down’s of the market are much less important. Develop an income plan if the number one goal is to have income to fund what is important. Or what we call The Independent Income Plan.
In creating a written retirement income plan, what an individual will need to complete is write down the sources and amounts of both reliable and variable incomes. Reliable incomes are social security, pension income, and lifetime income from annuities. Reliable income is payments that generally stay the same for life. Variable income is the money that is expected from investments. This money can vary from month to month or year to year.
Now review each source of income and identify specific ways to increase the predictable income that is being generated. For example, a married couple has over 700 possible combinations of when to draw social security benefits. The decision between the best and worst case can often times cost hundreds of dollars a month of missed income. Pension income can be affected based upon factors such as lump sum payouts or survivorship options. Just because everyone else at work took this option, does not mean that is best choice for your family. At times what you thought was the best choice could actually end up being a costly and irrevocable mistake.
Variable sources of income can usually be improved as well. One of the main ways to accomplish this is to perform a yield analysis. Yield is the amount of income that is being generated by dividends and interest. Identify lower interest earning accounts and investments and consider alternatives that create additional predictable income. Both safe and risky strategies are available. For example, instead of having mainly growth stocks that pay little to no dividends, consider adding several high quality dividend paying stocks. A 2% increase for a retired couple with $300,000 of investments would generate $500 extra a month of income.
A third area to focus on in creating the written retirement income plan is keeping more of what you earn. As income is produced there is usually a person or entity trying to take a portion of that income. That usually comes in the form of fees, expenses, and taxes. Eliminate excess fees and expenses as much as possible and avoid paying commission to buy and sell investments. Consider the options that are available that can be used to reduce and eliminate the taxable income paid in retirement. Don’t assume that is your “fair share.” Get a second opinion if needed.
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550
Headline sources:
http://www.marketwatch.com/story/the-only-5-investments-you-need-to-own-2015-03-03
http://www.marketwatch.com/story/big-money-is-moving-to-cash-and-so-should-you-2015-03-02
