Making an Income For Yourself, Part 1

One of the really critical aspects of financial planning that often is overlooked in the early stages is planning your income during retirement.  It’s really not just a matter of withdrawing money as you see the need – there’s a benefit to planning it out and having a strategy as you create your income stream.

First of all, as with any planning activity, you need to determine a couple things:  where you are now, and what your goal is.  The first part, where you are now, is simple if you’ve got a handle on your overall portfolio… if not, you may need to spend some time organizing things.

Where You Are Now…

Split your portfolio into two categories:  income and assets.  So, if you have a pension plan at work that will be providing you with $x of income, count that in your income stream, along with annuities, rental and/or royalty income, and the like.  Include any part-time income that you intend to receive as well.  Total up all of these income items.

In another list, tally up all of your assets:  IRAs, 401(k) plans, the value of your vacation home, rental property, cash value of life insurance, savings accounts, and any other accounts or assets you might have.  Total these up as well.

Lastly, add up all of your liabilities – any loans, debts, or mortgages.  Break this list into two parts:  consumer or short term debt, and mortgages.  Tally up the two lists.

We won’t go into a lot of detail on the debt issue for now, but suffice it to say that if the short term debt category is significant (you define it – what percentage of your annual income is required to service the debt?), you’ll really should spend some time whittling that down before going into full retirement.

Where You Are Going…

The next piece is to quantify your goals – quantified to understand the income stream that is required to support your retirement lifestyle.  Tally up the cost of housing, taxes, insurance; hobbies, travel, and gifts for grandchildren; healthcare, transportation, and home improvement… you get the picture.  The idea is to be as complete and realistic about your income requirements as possible.

This is a good time to sit down with your spouse and talk about what really matters to each of you: those life goals that you’d like to accomplish, and how important each item is in the overall scheme of things.  Perhaps you already know these things about one another, but then again, you may not.  Take the time to listen to each other and learn.

With your list of lifestyle costs, you should be able to easily break this down into “required/fixed costs” and “variable cost/optional” categories.  An example of a required expense for most folks would be the electric bill.  This is also generally considered a fixed cost as well (even though it may vary over time, it’s difficult to reduce the figure appreciably if necessary).  A variable/optional cost might be fuel for your vehicle.  If you have public transportation available, you could impact that expense considerably.  Tally up the “required” category and prioritize the “optional” items in a separate list. Add the two lists together for a starting point for your monthly expenses.

The Bottom Line

Now that we know what our monthly expenses are and have tallied up our income streams, it’s time to bring the two together.  Look at the table below for an example:

As you can see, our income estimate comes short of the requirement in expenses.  At this stage two things can be done:  Either expenses can be reduced, or you can increase your income (if you have a way of doing so) – and most likely it will be a combination of the two.

The first method, reducing expenses, is why we prioritized the variable or optional expenses.  Take a look at your list, and see if there are any items that you truly don’t need or are not high enough on your priority list.  Put those items on the back burner for now, and re-total your table.  Chances are, you haven’t been able to trim things enough to get your income to match up with your expenses.

In Part 2, we’ll get into how to create an increase on the income side of your sheet, in order to balance things out.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author