In the previous post (“What Is Retirement Income Planning”) in this series on Lifetime Financial Planning, we set the stage by discussing what retirement income planning is and how it differs from the traditional investment portfolio approach to retirement funding. We’ll be discussing some of these items and other related topics in future posts as we explore ways to manage your retirement (next post: “It’s Not Your Father’s Retirement If It Ever Was”).
This chart summarizes some of those differences:
| Traditional Investment Portfolio Accumulation vs. Retirement Income Planning | ||
| Investment Portfolio | Retirement Income | |
| Focus: | Individual: Your money and your asset allocation pie chart | Household: You and your family’s lifestyle |
| Purpose: | Maximize return to grow portfolio | Secure risk-free income during non-working years |
| Method: | Invest in risky assets (stock and bond funds) | First build risk-free income floor (annuities, Treasuries, individual bonds), then create upside investment portfolio with discretionary funds |
| Key metric: | Portfolio size (assets under management) | Ratio of annual expenses divided by total savings |
| Resources: | Savings | Earnings, pensions/SS, savings |
| Risks: | Usual investment risks (volatility, interest rates, business risk) | Larger range of personal and public policy risks (ie, taxes, healthcare, longevity) |
| Risk Profile: | Risk tolerance: Conservative, moderate, aggressive | Risk aversion: Constant or relative to size of savings, only a factor for upside portfolio above the risk-free floor |
| Risk Management: | Diversified assets | Diversified risk management: longevity and health insurance, risk-free assets, diversified assets, reserves |
| Distribution: | Spend-down: sell off +/- 4% a year | Income floor matures every year to cover essential expenses |
| Upside: | If the market rises dramatically, you win | Your essential expenses are covered throughout retirement |
| Downside: | If the market suffers uneven returns, you lose – and might run out of money | Annuitizing may be best option for those who do not have sizable savings |
| Bottom Line: | Works best if you have a large portfolio and modest expenses | Your income is secure, you can focus on other things |