If you’re preparing for retirement, you’ve probably heard of the “retirement number.” It’s a commonly used benchmark to track retirement readiness. Essentially, it’s the amount of money you need to have saved before you retire.
The retirement number may not be the most effective benchmark, though. It’s a helpful target for knowing how much money you need to save before you retire. But what happens after you retire? It’s possible you may live several decades in retirement. If you spend too much money, especially in the early years, you could deplete your assets.
There may be another target that could help you manage your spending and protect your assets through retirement. It’s called an “income floor.” Your income floor is the minimum income you need to cover your most basic expenses and standard of living. It’s the amount you need to live comfortably.
The idea is to cover your income floor with sources that are guaranteed* for life, like Social Security or defined benefit pension benefits. If your basic expenses are covered, you can then use your savings to fund only your discretionary expenses, like shopping, travel, and more. In short, guaranteed* income covers your mandatory costs and your savings covers your fun spending.
How to Determine Your Income Floor
The first step is to estimate your income floor in retirement. A budget can be a helpful tool in this process. Start by listing all of your current expenses and then identify those that are necessary for you to maintain a comfortable standard of living. Your necessary expenses may include things like housing costs, car payments, utilities, groceries, and more. Look for those expenses that you couldn’t live without. Things like shopping or travel probably won’t make the cut.
Once you’ve identified your necessary expenses, estimate your current monthly spending in those categories. Will your spending change between now and retirement? For example, perhaps inflation will increase your energy or food costs. Maybe your debt costs will go down if you pay off balances before retirement. Think about how these expenses may change in the future.
Finally, look at steps to reduce your necessary expenses. For example, you could pay off your mortgage or even downsize to a smaller home. You and your spouse could go down to one car in retirement. Perhaps you could refinance outstanding debt to reduce your interest expense. The lower your necessary expenses, the easier it will be to cover them with guaranteed* income.
Tips to Fund Your Income Floor
There are a few ways to create guaranteed* income to cover your income floor. One is with Social Security benefits. Nearly 90% of adults over the age of 65 receive Social Security benefits.1 It’s a valuable income source for many retirees.
While Social Security benefits are undoubtedly helpful in retirement, they may not cover your entire income floor. The average benefit is just over $1,400 per month.1 If you have a lean budget, that may cover your full necessary expenses. However, for many retirees, Social Security only covers a portion of their budget.
Defined benefit pension benefits could also help you cover your income floor. However, many companies no longer offer pensions. A recent study found that only 18% of Fortune 500 companies offer pensions. That’s down from 59%in 1998.2
So, if Social Security doesn’t cover your income floor and you don’t have a defined benefit pension, what are your other options? One possibility is an annuity. There are a variety of different annuities that offer income that is guaranteed* for life.
One option is an immediate annuity. You contribute a lump sum into the annuity contract. The annuity provider then converts that lump sum into an income stream based on your life expectancy. The income is guaranteed* for life, no matter how long you live.
Another option is a deferred annuity with a guaranteed* withdrawal rider. Again, you contribute a lump sum into the contract. Your funds have the opportunity to grow over time. However, you also have the ability to withdraw a certain amount per year. As long as you stay within the withdrawal limits, your income is guaranteed* for life.
Ready to develop a strategy to fund your income floor? Let’s talk about it. Contact us today at Protecting Your Retirement LLC. We can help you estimate your income floor amount and create a plan. Let’s connect soon and start the conversation. Our Telephone number is 913-648-2700.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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