Retirement Income Planning

Mind the Gap

When planning for retirement income, you need to “mind the gap” between retirement expenses and income, with income not being sufficient to match expenses in a particular year.

If you’ve been to London and taken the Underground, you’re probably familiar with the phrase, “Mind the gap.” It’s a recorded warning to train passengers to be cautious when crossing the gap between the train door and the station platform. Having an affinity for the British and their sense of humor, this resonated with me and puts a smile on my face whenever I think of it.

When planning for retirement, you also need to “Mind the gap.” Just like with the Underground where you have an unsafe opening between the station platform and the train door, there’s often a separation between retirement expenses and income, with income not being sufficient to match expenses in a particular year. I like to refer to this as a “net expense year.”

In order to “mind the gap” in retirement income planning, you first need to identify the gaps. This is extremely complicated due to the many uncertainties and associated assumptions that must be made when doing this type of planning, a discussion of which is beyond the scope of this post.

The preparation of a cash flow projection is an essential tool for most financial planning situations. It’s indispensable when it comes to retirement income planning, including identification, analysis, and resolution of net expense years. Like any financial projection, a cash flow projection is only as useful as the information that’s used to prepare it.

Retirement income planning cash flow projections, unlike other types of cash flow projections where you typically work with a defined number of years, is complicated by the fact that you need to plan for what is generally an unplannable event, i.e., death. This becomes even more problematic when planning for couples.

It’s important to keep in mind that cash flow planning isn’t a one-time exercise. Cash flow projections need to be prepared and updated using multiple what-if scenarios on a regular basis before and throughout retirement. The use of account aggregation software is advisable, if not essential, for consolidating real-time information from multiple financial accounts in one place whenever this is done. I make the secure, online system that I use for this purpose readily available to my clients for viewing cash flow, investment, net worth, and other essential financial reports.

Projected net expense years, in and of themselves, aren’t necessarily problematic. There may be sufficient cash reserves or other liquid assets available that can be used to cover projected deficiencies in a particular year(s). Income tax liability associated with sales of nonretirement assets or withdrawals from retirement plan accounts needs to be calculated to determine the net amount available to cover projected shortfalls. When the projected net expense years are reoccurring and are projected to deplete investment assets, the sale of real estate assets, when available, including one’s house, may be required to provide funds to reduce or eliminate the gaps.

When planning for the years leading up to or during retirement, remember to “mind the gap.”

By Robert Klein

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.