What is an Income Plan?

One of the most important pieces we all need to have in place to be financially independent in retirement is an income plan. At Lord and Richards, we define true financial independence as being able to do what you love with the people you love and not having to work to pay for it. In this article, I will help you take another step towards that goal. Financial independence is much more than simply passive retirement.

At Lord and Richards, we take our clients through a process we call a Financial Independence Review?, a process that gives you a sense of confidence, a sense of absolute certainty about your financial future. One of the key areas we examine is whether you have an income plan that will sustain you for the rest of your life. People often think of their income plan as simply their various sources of regular income, like pensions, Social Security, and dividends from stock.

As part of your Financial Independence Review?, we want you to consider whether you have a combination of incomes from various sources that will ensure you never run out of money before you run out of life. He who runs out of cash loses. Even if you do not entirely run out of income, you may have difficulty sustaining the lifestyle you envisioned in retirement. There was a time when people lived the "fixed income lifestyle" in retirement, where they settled down and did less despite having more leisure time. That idea has led many to believe they will need less money in retirement.

What I'm seeing these days is quite the opposite. People want to do more in retirement, not less. While you're working, weekends are typically the days of your most discretionary spending. You choose how much to spend to eat out, see a movie, or go skiing during the winter. When you retire and leave that weekday job, suddenly you have a lot more "weekend" time. That extra leisure time can result in a lot more discretionary spending.

More and more people today are determined to realize the dream of doing more in retirement and staying active. You can have more than a passive retirement of rocking away the years. That passive retirement lifestyle can even lead to health problems like depression, immobility, and decreased mental function. You can be healthy. You can be active. You can throw yourself into retirement and make the most of it. Spend time with your kids and grandkids. Travel the world or just the United States. Some of our clients have set out to visit every state park in the United States. Whatever your vision is, you don't want to be paralyzed by the fear of spending too much and running out later in retirement. That's why you need a written income plan.

At Lord and Richards, our income plan starts with examining your probability of success, which I'll explore further in another article. For now, let's look at some elements that go into an income plan. Your income sources might include a military pension or perhaps rental income. We want to determine when you need to draw from those various sources. Another source can be Social Security. I've gone into detail about that in previous articles, and another article is coming up that will help you dial in your Social Security benefits.

A second question is whether you should take your income from market-invested resources, like IRAs or 401Ks. When the market is doing great, it feels good. The general rule of thumb is to take 4-5%. If you've got a properly allocated portfolio, a little stock, and a few bonds, you’ve been told by experts that you should be fine; there's no need to worry about it. But what happened during 2008, 2009, and other market drops is that people did worry about it. They saw those markets taking money away so fast it became clear their portfolio wouldn't last. Taking primary income from market-based or risk-based investments can be a losing strategy. This doesn't mean that you can't live off your 401K, but there may be better strategies.

I want to find as many rock-solid guaranteed strategies for income as I can. If you have a great government pension or private pension, build that in. Optimize your Social Security and any other guaranteed income sources you have.

There are also non-guaranteed income sources, such as market risk-based investments. It's possible to take your market risk-based investments, shift them into protected investments, and draw income from investments that don't decrease in value. These aren't necessarily CDs, although you can get CDs with excellent growth potential that protect you on the downside. However, a market-linked or market-indexed CD can protect your principal while connecting you to potentially higher growth with the market. There are many tools and not just the good old-fashioned, low-rate CDs you may be used to.

You don't have to do this through a bank. Other resources are available through insurance and annuity companies. If you resist using insurance or annuities, you may want to take a second look. These days, there are tools to provide guaranteed income that will protect your principal and have low or no fees so you can have a stable income for life. All these types of resources go into an income plan.

In subsequent articles, we will dive deeper into how to ensure you have the highest probability of success and won't run out of money before you run out of life; that's what we call financial independence.

My team and I would love to have a conversation with you. Give us a phone call or visit our website at www.lordandrichards.com.