Retirement: Ensuring a life-long income stream

Do you daydream about how you are going to spend your retirement, or are you anxious about running out of money down the road When it comes to retirement planning, we tend to ask ourselves: “what's my number” referring to the total dollar amount of our savings.

Our focus is squarely on the size of our investment portfolio we're aiming for when we hit retirement. Of course, this is important when you're in the wealth accumulation stage of retirement planning.  But the closer you get to retirement, and certainly when retirement is less than a decade down the road, you would be wise to start asking yourself a new question: “How much income will I have to spend in retirement”

Income allocation has become the new watchword when it comes to retirement planning. There's a change in your focus when you leave the workforce (and the income flow that goes along with it) and use your savings and investments to cover your expenses. Some of your sources of retirement income may be guaranteed and provide for lifetime income, while others are variable and intermittent. Some will adjust with cost of living increases, others will not.

So, why is understanding your income allocation important The closer your guaranteed income matches your fixed expenses in retirement, the more peace of mind you'll have. Variable income may allow you to take a vacation, but trying to fund daily living expenses with variable income could be a recipe for hardship sooner or later. Income sources that are guaranteed and well-matched to cover your fixed expenses will ensure that you can afford to keep a roof over your head and food on the table, regardless of what surprises may come your way in retirement.

When you consider that you could be spending 20 years or more in retirement, chances are high that you will encounter several ups and downs in the market, and so it's important to weigh your risk exposure relative to your need for secure income. Investments such as life annuities or other products, such as funds that are geared towards minimizing volatility while offering more stable returns, may be introduced to help guarantee your retirement income so that you can comfortably meet your fixed retirement expenses while increasing your “sleep well” quotient.

The whole point of this exercise is to help ensure a life-long income stream to support the lifestyle you want in retirement, which is a much different approach than just determining the total amount you need to save.  Embarking on retirement can be daunting, which is why I recommend starting this process at least 10 years out from retirement.

And remember, income planning doesn't magically stop when you retire. In your golden years, you still need to assess your income flow, adjust your investments to ensure they match your risk tolerance, and make contingencies for the unexpected.