Retirement Income

August 1, 2023 | Todd Little, CFP®, AIF®

What’s your number? That’s a question typically asked by pickup artists, magicians, and…financial planners. Since I never had much success in the first two categories, I’ll stick to financial planning. 

A few years ago, a major investment firm ran an ad campaign based on this concept. The ad showed various people walking around carrying dollar amounts under their arms with the tag line: “What’s your number?” The point of the commercial was to focus on how much money people needed to retire and everyone’s number was different. 

While the concept is somewhat helpful to raise awareness around the retirement goal, I feel it misses the mark. Retirement success is not simply measured by how much money you’ve saved by retirement, but if you will have enough income to maintain the lifestyle you want throughout your retirement years. [Check out last month’s blog to learn more about some of the expenses you should consider when you’re trying to determine how much income you need.] 

Most people can expect to benefit from at least one other income source in retirement in addition to their own savings. There are three main sources of retirement income in what used to be referred to as the three-legged stool: Social Security, pension income, and personal savings. 

Social Security – I won’t use this forum to discuss the financial strength or potential changes to Social Security in the future. For now, I’ll just focus on the current structure of Social Security – which is really a government-funded, inflation-adjusted, lifetime annuity. Most people underestimate just how much of a benefit Social Security can be over their lifetimes. The challenge with Social Security is deciding when to begin collecting your benefit. There used to be more strategies available, but even with fewer options today, it is not always a simple decision. You want to discuss your personal plan with a financial planner that is familiar with Social Security and the best way to implement it into your plan. Starting Social Security at a less than optimal time in your plan could mean the loss of hundreds of thousands of dollars for you and your surviving spouse. 

Pension income – Unfortunately, pensions have become less common since the advent of the 401(k), but if you are still fortunate enough to have one, you realize – or soon will – the peace of mind that comes from having this leg of the stool. Pensions, like Social Security, provide a fixed income that is typically guaranteed for life. This takes away two major income risks from people: market risk and longevity risk. Market risk is the fact that when the investment markets are not performing well, your investment accounts may decrease in value. If you are dependent on your investments for income, that could cause you to reduce or stop your income during those periods in the market. Longevity risk is the idea that if a person lives a long time – maybe even longer than they ever expected – they could run out of money. Pensions alleviate these risks because they are not subject to market performance and are lifetime guaranteed, sometimes even for the lifetime of a spouse. 

Savings – “Personal savings” describes, generically, what you are likely already familiar with as your 401(k)s, 403(b)s, 457s, IRAs, Roth IRAs, etc. In other words, all the money you saved out of your working paycheck to use someday in retirement. The difference between Your Savings and Social Security or Pensions is exactly that… it’s yours. While that means you have the most flexibility and control of those dollars, that also means the market risk and longevity risk are also yours. You likely cannot maintain a retirement lifestyle based on just Social Security and Pensions alone, so your own savings will be needed to supplement those other income sources, but how do you know how much you can withdraw without fear of running out of money – either because the investments don’t perform well or because you live longer than you planned on your savings to last. I should point out that it is possible to create your own “pension” in retirement if that is something that appeals to you. 

The key to any successful retirement plan, then, is to understand all three legs of the income stool and have a comprehensive strategy that maximizes and coordinates each of them. Some people are comfortable making those decisions on their own, but many people understandably seek the advice of a professional. If you would like to discuss your own retirement plan with us, we’d be delighted to schedule a free consultation. We may not be able to answer the question, “What’s your number?,” but we can work with you to give you a retirement income plan that is an even better answer. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.