Fundamentals of Retirement Income Planning

Properly timing the distribution of income during retirement is critically important to living a financially secure in your golden years.

There are two main risks of not timing your income distributions correctly. These risks include running out of money too soon and not living the lifestyle you could have afforded. Neither of these situations are optimal, thus we need to carefully plan for the distribution of assets during retirement.

Goals of Retirement Income Distribution

As stated above, its critical that you create a robust income distribution plan. In order to accomplish this, you will need to determine all of your sources of retirement income and their available distribution options.

Once that is complete you can begin to determine what retirement income distribution strategies are available to you. This will help optimize your income situation so you can live your desired lifestyle during retirement.

Types of Retirement Income Distribution

Depending on what type of asset and retirement accounts you have, you will probably be constrained to a few common income distribution scenarios.

Lump Sum - Lump sum distributions are taken all at once. This option provides you with funding flexibility in the event that your expenses become unpredictable or vary widely from month to month.

Systematic Withdraws - In contrast to the lump sum payment options, some asset and retirement accounts will allow you to take systematic withdraws. These withdraws will be taken in the same amount every month or payment period. This option provides less flexibility, but more financial security.

Required Distributions - Finally, some asset accounts will require you to take distributions at a certain point in time. These distributions are usually age based, such as Social Security. In this plan you will have to being to withdraw benefits at age 70.

Retirement Income Distribution Strategy

Since the point of developing a retirement plan is to ensure that you use your retirement income wisely, start your strategy by timing your cash flows. Since everyone has a different retirement situation, I have provided the following objectives to help guide your retirement income distribution strategy.

Create a Strong Foundation - I like to being a retirement cash flow plan by determining a client's fixed costs during retirement. This helps me determine how much money will be absolutely needed every month. If at all possible, I also like to have monthly systematic withdraws cover all monthly fixed costs (mortgage, food, clothing, etc.). This helps secure my client’s financial future.

Increase Flexibility as Needed - Hopefully you have enough annuity or systematic income options to cover fixed expense. If this is true, you can then use your lump sum income options for flexible expenses such as vacations, entertainment and other discretionary expenses. However, if you do not have enough systematic income to cover your fixed expenses, you may need to tap into your lump sum accounts to help supplement your fixed monthly income.

Retirement income planning can quickly become a complicated matter. This is due to the constraints that many retirement plans place on our ability to withdraw benefits when we need them. By taking the time and developing a solid income distribution strategy, you can increase your financial security and live the best retirement that you can.