Retirement Asset Planning Retirement Income Planning

Do You Want to RAP or Do You Prefer to RIP?

Retirement planning is unquestionably the most difficult type of goal-oriented financial planning. Most goal-based planning is straight-forward, solving for the amount, and frequency, of payments that need to be made to accumulate a sum of money at a future date using two assumptions: rate of return and inflation rate.

College education planning is a good example of the use of this methodology with a twist. Unlike other planning where the future value will be withdrawn in one lump sum, college costs are generally paid for over a series of four or five years. This complicates the planning since it requires the calculation of the present value of the future annual costs of college at the beginning of college, which in turn becomes the future value that must be accumulated.

Retirement Asset vs. Retirement Income Planning

Retirement planning is a whole other world. For starters, there are two stages of retirement planning, i.e., retirement asset planning (RAP) and retirement income planning (RIP). Until recent years, RAP was the only type of retirement planning and, as such, is what’s considered to be traditional retirement planning. RAP’s focus is the accumulation and “spending down” of assets. Although it’s more complicated, much of the methodology used is similar to other types of goal-oriented financial planning.

While RAP works well in the accumulation stage, it isn’t designed for calculating, and planning for, projected retirement income amounts that need to be available to pay for projected retirement expenses during various stages of retirement with unknown durations. As a result of the uncertainty of traditional RAP as a solution for providing a predictable income stream to match one’s financial needs in retirement, RIP was born.

Retirement Income Planning Issues

In addition to possessing the knowledge and experience of financial planners who specialize in RAP (RAPers?), retirement income planners (RIPers?) require an expanded skill set and associated knowledge to assist their clients with issues that are unique to RIP before and throughout a client’s retirement years. Planning issues extend well beyond asset accumulation and include, but aren’t limited to, the following:

  • Medicare
  • Long-term care
  • Social Security claiming strategies
  • Conversion of assets into sustainable income
  • Income tax minimization
  • Choosing strategies to address gaps in income
  • Retirement plan distribution options
  • Retirement housing decisions
  • Philanthropic
  • Estate transfer

Recommended Timeframe

Retirement planning is a time-sensitive and arduous task that requires a high level of discipline and commitment over the duration of one’s adult years, not to mention specialized expertise. Given the relatively short accumulation period compared to the potential duration of retirement complicated by an unknown escalating cost of living, the RAP phase should begin as soon as possible.

There are always competing goals, including saving for one’s first house and education planning, to mention a couple. All financial goals must be balanced against one another, keeping in mind that the ability to provide for your support – before and throughout retirement – supersedes all other goals.

RIP works best when it’s initiated long before you plan to retire. In addition to the nature and complexity of the various planning issues, this is very important given the fact that historically approximately 50% of all retirees retire before they plan on doing so. Given this reality, a 20-year pre-retirement RIP timeframe is recommended.

Finally, it’s important to keep in mind that RIP doesn’t end the day you retire. The success of your retirement years is dependent upon your ability to employ and adjust RIP strategies for the duration of your, and your spouse’s, if applicable, retirement years.

Do you want to RAP or do you prefer to RIP? As I hope you can appreciate, you need to do both at the appropriate time in your life in order to enjoy your retirement years on your terms.

See Planning to retire? Start with the right question

Retirement Income Planning

Do You Have An Income Portfolio Plan?

We’re all familiar with the concept of an investment portfolio. Wikipedia defines it as “an appropriate mix or collection of investments held by institutions or a private individual.” It explains that “holding a portfolio is part of an investment and risk-limiting strategy called diversification.”

A well-diversified, professionally-managed investment portfolio can enable you to pursue various financial goals, including financial independence, in the accumulation stage of your life. As you approach, and move into, retirement, a customized income portfolio plan is essential for enabling you to close the gap between your projected income needs and your projected income sources without worrying about, and being dependent upon, the gyrations of the stock market.

How many of us have heard of a “retirement income portfolio,” or the term that I have coined, “Financial Independence Income Portfolio™?” I would suspect that not many people are familiar with these terms. I will simply use “income portfolio” for the remainder of this post to introduce this innovative planning strategy and explain why it should be the cornerstone of every retirement income plan for all individuals beginning ten years before retirement.

You may be wondering, what is an income portfolio? Whereas an investment portfolio uses a mix of assets, including stocks, bonds, and other types of investments with the goal of minimizing investment risk, an income portfolio uses streams of income to accomplish the same objective. The income streams can be produced at different intervals, i.e., monthly, quarterly, semi-annual, or annual, based on your needs.

There are several types of investments that can be used to generate income streams, each with their own advantages and disadvantages. These include, but are not limited to, CD’s, bonds, life insurance, and annuities.

Depending upon your situation, one or more of these investment vehicles can be used to design a strategy, or plan, to close the gap between your projected income needs and your projected income sources. Similar to an investment portfolio that is used in the accumulation stage, a secondary benefit to be derived from an income portfolio is minimization of investment risk.

It’s a fact of life that, unlike our parents’ generation who could depend on a monthly pension supplemented by Social Security, most individuals retiring today don’t receive a monthly income. Consequently, although no small task, we must create, manage, and protect our own income streams. The means to accomplish this, i.e., an income portfolio plan, should be the cornerstone of every retirement plan for all individuals beginning ten years before retirement.