In our hearts we know which parts of our retirement plan are working and which are not.  We don’t need another hardball pitch on miracle investments or guaranteed income for life.  Some consumers need quiet time to plan. Others need the confidence that a roadmap brings.  When those are insufficient, you need a financial guide.   

Below is a roadmap of the basic information and process for retirement income planning that I and others have used informally.  It does not address choice of investments or tax strategies. 

Your life expectancy plus 10 years might be a suitable retirement plan horizon (see Table 6 in this CDC publication).  For most retirees, 30 years may be enough of a horizon.

Start with income.  You need your retirement year.  If you are still working, you will need the income figures and year you plan to retire.  If you expect to work part time (to monetize a hobby, to get exercise, or mental challenge, or interactions with others) you will need to estimate the years of part-time work and yearly wages.  Be careful, if you receive Social Security “early,” it confiscates much of those wages during the years before you are eligible for full social security retirement.

List your assets.  You will need the expected balances in retirement savings plans (401k, IRAs, employer Pension, Simplified Employment Pension or Keogh).  You need to know the equity in your current home (as of the time you expect to sell it), and the value of savings accounts, brokerage accounts, businesses, and trusts or structured settlements that you have.   

List your debts.  You will need monthly payments and payoff values for mortgages and automobiles, real estate taxes, consumer loans, and any recurring expense such as food, clothing, insurance, travel, telecom and entertainment. 

Make sure the inflows exceed the outflows.  To do this we will compose a block of annual expenses and block of annual income figures.  The figures will be extended out for several years so that we can watch for troublesome vents or trends.  You can use sheets of paper to list financial items in rows and years in columns (ideal for Excel or equivalent).  At first we would use pre-tax values.  Later we can insert refined tax adjustments. 

Let’s start with expenses.  List and total the “must have” items (mortgage, federal and state and property taxes, insurance, car payments, loans, food, gas & oil, communications, medical).  Below those, list and total the “desirable” items (e.g. travel, entertainment, a set aside for long term care).  Convert the monthly numbers to annuals and extend those expenses out for several years.  If there are balloon payments, give them a row of their own and enter balloon amounts in the correct years.  

Inflows are income (the total of wages, net income, social security, pensions, and earnings from assets), plus any portion of assets you choose to “spend.  List the income components.  Separately list assets, and alongside assets estimate the “earnings” (interest, dividends, etc.) that you expect each asset to generate.  Extend those expected “earnings” out for several years and copy asset generated earnings to below the column of incomes.  Insert balloon income such as capital gains from a home sale.

Assets such as your home are unlikely to generate “earnings.”  Other assets such common stock in an IRA may yield earnings that you could harvest by paying income tax due.  If you can, choose to receive only the proceeds you actually need from your IRA, otherwise you would be denying yourself the earnings on taxes you paid too early.  The IRS also requires that you take at least a “minimum distribution” when you near age 70½.

Compare total income against “must have” and “desirable” expenses totals.  Ideally income exceeds both “must have” and “desirable” expenses.  In years that this is the case, your assets can grow without being pruned to supplement to your income.  If income covers just the “must have” expenses, you should consider better-paying employment and cutting back on expenses.  If your income does not cover “must have” expenses, you probably want to work, cut back and consider cashing in assets to spread over near-term years in your planning horizon.   

As you make updates to income, expenses, asset earnings, and asset amortizations numbers, you will repeatedly alter the balance of inflows and outflows.  Done right, the changes can help you simulate moving to a sunnier climate, to a back yard with its own harbor, to a jurisdiction with sane taxation, to places where golf carts rule, or where graffiti and noise pollution are rare.   

If you are uncomfortable navigating the roadmap without a coach, by all means hire a financial planner.  Good financial planners will charge you for competent, unbiased advice – rather than hiding the fee in sales commissions for stocks, bonds, annuities or insurance, a setup that can warp their recommendations.  If your situation is complex, you may also need tax counsel help.  Retirement planning is not an event; it’s a process to be repeated at regular intervals.  Paying attention to a professional planner’s guidance may equip you to do it for yourself. 

Neither the author nor American Consumer Institute know the reader’s specific financial circumstances.  Instead of relying on any of our comments, we urge the reader to obtain retirement counsel from his/her own financial advisor.

Alan Daley is a retired businessman who lives in Florida and who writes for The American Consumer Institute Center for Citizen Research