Creating a Sustainable Retirement Income Plan

The Three Pillars of Retirement Income

Most retirees draw income from a combination of sources. Understanding how these are utilized over time is integral to the success of any plan.

1. Guaranteed Income. These are sources that provide stable, predictable payments; such as Social Security, pensions, and guaranteed annuity payments. Guaranteed income forms the foundation of retirement cash flow as these are funds that can be counted on throughout retirement.
2. Part-Time Work or Alternative Income. Some retirees chose to bridge their early retirement years with part-time or seasonal work, consulting in their respective field, or income from a rental property. While not required, supplemental income can significantly reduce pressure on your investment portfolio during the early years of retirement.
3. Investment Withdrawals. Your retirement accounts (IRAs, ROTH IRAs, taxable brokerage accounts) supply supplemental income needed to support your lifestyle.

Tax Efficiency Considerations (aka The Tax Control Triangle)

Taxes can be one of the most overlooked and largest expenses in retirement. A sustainable plan carefully orchestrates withdrawals from different account types: taxable, tax-deferred, and tax-free. A coordinated strategy blends these accounts to manage tax brackets, avoid IRMAA surcharges, and reduce RMD burdens - optimizing the Tax Control Triangle and working to extend portfolio life.

Managing Market Risk

The danger of market downturns early in retirement, when withdrawals are often highest, is a real concern for new retirees. As the chart below highlights, the sequence of returns greatly impacts what your portfolio needs to earn after a down market to get you to break even. To mitigate the risk of a market downturn, a sustainable plan often includes a diversified portfolio that is regularly rebalanced. At CWM, one of the ways we diversify portfolios is by blending strategies to help manage risk and achieve your goals.

Social Security Optimization

Social Security is often the largest guaranteed income source in retirement. The decision of when to claim, between ages 62 and 70, can drastically impact your total lifetime benefits. As with most things in life, there is no “best” option that works for everyone.

There are multiple factors to consider such as health, spousal benefits, working situation, and spending expectations early in retirement. I often find myself answering clients’ questions with “It depends”. Determining when to take Social Security is possibly one of the biggest times that answer applies. Having a comprehensive financial plan is the only way to truly answer what timeframe makes the most sense.

Planning for Healthcare and Long-Term Care Costs

Healthcare is one of the biggest variables in retirement, and ignoring it can threaten even the strongest plan. In particular, long-term care is commonly underestimated in terms of cost. Considering healthcare coverage options, including Medicare, are vitally important to any plan and discussions about long-term care costs, such as insurance, self-funding, or family help need to happen WELL in advance of retirement. Custodial care costs, in particular, need to be thought about when you are relatively young (around age 50) and insurable. This gives you runway to analyze the best way to cover this need. While Medicare Part B and D are generally simple to forecast, out of pocket costs often exceed expectations, especially in your elder years.