Retirement Income Planning: Spend Your Nest Egg the Smart Way

If you’re a savvy saver and investor, you’ve spent a good chunk of your adult life diligently building up your funds to provide a reliable source of monthly cash flow in retirement. Over the years, you’ve watched your wealth grow, and every time you marked a new milestone—$100,000, then $500k, that first $1 million, and possibly more—it felt pretty darned good! You’ve saved consistently, taken advantage of compounded annual returns, and invested at an appropriate level of risk for you. If you’re smart and lucky, by the time you near retirement age, you’ve amassed a sizable pile of money—enough to give you the confidence to kick back, relax, and enjoy a post-work lifestyle. 

Then it happens: you decide to take the leap and retire. You put a halt to the daily grind once and for all, stop receiving a paycheck, and start spending your well nurtured, perfectly honed nest egg. 

Yikes! That’s the point when you realize that the process of spending isn’t as easy as it sounds!

It may sound strange (after all, retirement is a good thing!), but most people struggle with the transition from saving to spending. It’s a change that requires an intentional shift in thinking, and it can send your brain spinning. Instead of accumulating, you are now tasked with de-accumulating your creation in order to gain a stream of inflation-adjusted income that pays the bills, funds any health contingencies, and provides a legacy for your heirs. This new phase, called the distribution phase, needs to be tackled with extreme care to ensure you don’t outlive your savings. The pressure is on! And, like a game of Pick-Up Sticks or Jenga, it can feel like one wrong move will make the whole pile collapse—and take your future along with it. 

Smart planning is the key

As scary as it may seem, you can succeed at spending in retirement… as long as you have a carefully constructed retirement income plan.

If you’re not familiar with retirement income planning, you’re not alone. It’s a relatively new concept that has been getting a lot of attention in recent years, thanks to aging baby boomers. Over the past 50 years, there have been many changes to address the growing needs of the boomer generation. In the 1950s and 1960s, schools and universities were built to accommodate the largest generation in history. In the 1970s and 1980s, new homes and communities met the demand of boomer families. Thanks to advancements in medicine, boomers are living longer and healthier lives than previous generations. Now we see the blossoming of communities for active older adults, advances in senior healthcare (think Medicare’s ‘Silver Sneakers’ program), and the emergence of an entirely new area of financial research: retirement income planning.

At KFA, we’ve been tracking the development of retirement income planning, and we continue to monitor the evolution of new frameworks to address your income needs in retirement. New challenges will crop up between the day you take that last paycheck and the day you take your last breath. Ultimately, our goal is to offer solutions that give you the best possibility of never having to worry about money. 

As new ideas emerge, we closely follow academic and applied research to take advantage of every advancement. Here’s a quick look at what the KFA retirement income planning process looks like today:

Step 1: Assess your retirement goals

Like all our financial planning processes, retirement income planning begins with you. We start by taking a close look at your retirement goals (the lifestyle you want to live, the legacy you want to leave, and the liquidity necessary to support it all) and at potential risks (inflation, taxes, and—we hope—your extended longevity).

Step 2: Identify your financial resources

Next, we look at all the sources of wealth available to meet those goals. These might include a combination of social security and pensions; investments in tax-advantaged retirement accounts and taxable non-retirement accounts; insurance products; cash savings; and home equity. We then devise strategies to manage additional risks, such as market risk and sequence of returns risk.
Step 3: Project your retirement spending

The final step is to compare what you have with what you need to cover your financial obligations in retirement. In general, these include four areas: your essential expenses (taxes, debt repayment, and basic living costs), discretionary expenses (travel, leisure, and lifestyle improvements), the legacy you want to leave loved ones and charities, and the great unknowns of healthcare and long-term care.

Once we have identified your goals, your resources, and your retirement spending, we work to connect the dots and align all three. To the extent possible, we avoid market risk from the funds needed to cover the essentials, then we develop a portfolio strategy to achieve your lifestyle and legacy goals. For the unknowns, we consider funding options that may include insurance, home equity, and additional investments. And to increase the strength of your dollars, we take steps to optimize taxes, implement the most effective social security claiming strategies, and manage your debt. 

Spending in retirement can be scary. At KFA, our goal is to help you navigate this new territory with confidence, using proven and emerging retirement income planning techniques that can help remove the stress of spending down your hard-earned, well-invested nest egg. At every phase in your financial life, we are here to help!

Related: Estate Administration: A Guide for the Perplexed