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The Retirement Income Planning Process

  • Retirement income planning is part of our Envision® process.
  • Your financial advisor will help you analyze expenses and income.
  • Over time, revisit your plan.

Begin with a plan

Retirement is typically a time that brings major changes to your lifestyle and finances. You no longer depend on a paycheck from work. You shift to other income sources such as savings, investments, pensions, and Social Security. As you transition into retirement, it’s critical to ensure your income can support you for years to come.

This time requires a plan to effectively manage retirement challenges. The Envision planning process is the foundation for developing your retirement income plan. It can help you make informed choices and find strategies to address the following questions:

  • When/how can I retire with confidence?
  • What can I do to help make my money last through retirement?
  • How do I plan for and respond to unexpected events?

Set Goals

Retirement isn’t about set it and forget it. It is about accomplishing the things you want to. Plan some fun things, and dream about what you can accomplish! But also, take care of things you really wish too. Setting small goals (cars, travel destinations), large goals (second homes, weddings, etc), and regular goals (healthcare expenses, estate planning) can help you track how you are doing. Your lives will change, and your goals may too! Retirement shouldn’t just be about a set spending amount every year for life.

The Envision planning and discovery process

A first step in developing a comprehensive retirement income plan is a “discovery” session. During this discussion your financial advisor will gain a thorough understanding of your overall financial situation. You’ll also start to explore your vision for your non-working years.

It’s important to spend some time thinking about this. How you plan to spend your time will drive budget and spending decisions.

Expense budgeting and planning

As you begin to think more seriously about retiring, it’s important to get more precise in planning your budget and expenses.

You may be familiar with the rule-of-thumb that suggests your expenses in retirement will be approximately 80% of your pre-retirement expenses. This may be a good starting point. As you begin to think more seriously about retiring, it’s important to get more precise in planning your budget and expenses.

Depending on the lifestyle you hope to live during your non-working years, your expenses may actually increase. A more luxurious lifestyle that includes frequent travel, a second home, and expensive hobbies will change your budget and expenses.

The most important factor in helping ensure your savings last through your lifetime is how quickly you draw down your assets. That’s why it’s important to conduct an extensive review of all your expenses.

You can use the Expense Planning Worksheet (PDF) or create your own list. It’s helpful to group expenses into two main categories — essential and discretionary.

A key expense many pre-retirees fail to take into account is health care.

A couple both with median drug expenses would need $221,000 to have a 50% chance of having enough money to cover health care expenses in retirement. They would need $293,000 to have a 75% chance of covering their expenses and $349,000 to have a 90% chance of covering their expenses.*

While health care expenses will vary widely depending on your overall health and access to coverage through your former employer, it’s important to remember to budget for health care.

Analyzing income sources

While analyzing your expenses, your financial advisor will help evaluate your income sources. This starts with creating an inventory of all current and potential sources. These might include retirement plan savings, pensions, rental income, and Social Security.

If you have not already started taking Social Security, your financial advisor can help evaluate your options. When and how you choose to take your Social Security benefits can have a significant impact on the total benefits you receive over time.

Most Americans don’t understand there are a variety of Social Security benefit options and complex strategies to consider. Your financial advisor has access to robust software that can help analyze many of the benefit scenarios and help evaluate which one best fits your personal circumstances.

Once you’ve identified your sources of income, your financial advisor will analyze your income and expense information. Modeling tools within the Envision process help determine the likelihood your projected income will meet your desired spending levels.

The Envision technology will assign a probability of success score. The higher the score, the more likely you are to be able to spend according to your estimates and not outlive your assets. If there is a gap, your financial advisor can suggest changes to your portfolio or goals.

Decisions and trade-offs

A key component of your retirement income plan is the ability to be flexible and make trade-offs.

A key component of your retirement income plan is the ability to be flexible and make trade-offs. If you have different goals or dreams you’d like to look at, you and your financial advisor can test these scenarios in your Envision plan.

Changing your spending can help reduce the risk of draining your assets too early in your retirement. Adaptable spending is one strategy. You reduce how much you are withdrawing from your portfolio in difficult market periods to help preserve the value of your assets that could potentially rebound if the market recovers. You can revisit your options over time:

  • Evaluate essential and discretionary expenses
  • Adjust your discretionary spending
  • Delay major purchases
  • Postpone retiring and work longer
  • Work part time to help cover day-to-day expenses

Modify your investment strategy

In addition to adapting your spending, another way to help make up for an income gap is to modify your investment allocation. If your investment mix is too conservative — with an over allocation to fixed income investments, for example — your assets may miss out on growth opportunities and not keep pace with inflation and spending. On the other hand, too aggressive an approach with a heavy weighting in stocks can result in excess volatility.

An important first step before making any portfolio adjustments is to understand your risk/reward tolerance. With that in mind, your financial advisor can analyze ways in which your portfolio could be adjusted using the Envision planning process. The goal is to balance your need for income in the short-term while seeking to preserve your principal to continue to generate income for the longer term.

Planning your withdrawal strategies

As discussed above, your income in retirement could come from several sources that might include:

  • Taxable (brokerage and savings)
  • Tax-deferred 401(k)
  • Traditional IRA accounts
  • Tax-exempt (Roth IRA) accounts
  • Guaranteed Income (Social Security and Annuities)

Planning from which accounts to take withdrawals and when to do so can be complex.

Your financial advisor can help evaluate your investments and recommend withdrawal strategies. These strategies will consider short-term income needs, manage tax implications and maintain your portfolio allocation to be consistent with your long-term objectives.

Adapting to changes

Infographic - Your plan in motion

Even with a comprehensive retirement income plan, markets can be unpredictable and life events can affect your spending. That’s why it’s important to monitor your portfolio and withdrawals.

You and your financial advisor can discuss your portfolio performance, your spending history, and your budget and to discuss future spending as well as changes that might require adjustments to your investments or spending.

The retirement income planning process is not a “one and done” event. It can be viewed as a circular process. The initial plan will be set based on your situation at that point in time. Over time, you can work with your financial advisor to discuss any potential changes to your plan.

Next steps

  • Explore your vision for your non-working years.
  • Identify your essential and discretionary expenses.
  • Inventory potential sources of income in retirement.
  • Meet with your financial advisor to create your personalized retirement income plan.

*Source: EBRI, October, 2018. Health expenses include premiums for Medicare Parts B and D and Medigap Plan F as well as out-of-pocket spending for outpatient prescription drugs.

Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and legal advisors to determine how this information may impact your own situation.

IMPORTANT: The projections or other information generated by Envision regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.

Envision methodology: Based on accepted statistical methods, the Envision tool uses a simulation model to test your Ideal, Acceptable and Recommended Investment Plans. The simulation model uses assumptions about inflation, financial market returns and the relationships among these variables. These assumptions were derived from analysis of historical data. Using Monte Carlo simulation, the Envision tool simulates 1,000 different potential outcomes over a lifetime of investing varying historical risk, return, and correlation amongst the assets. Some of these scenarios will assume strong financial market returns, similar to the best periods of history for investors. Others will be similar to the worst periods in investing history. Most scenarios will fall somewhere in between. Elements of the Envision presentations and simulation results are under license from Wealthcare Capital Management, LLC. © Wealthcare Capital Management, LLC. All rights reserved. Wealthcare Capital Management, LLC is a separate entity and is not directly affiliated with Wells Fargo Clearing Services, LLC.