How to Build Your Retirement Money Plan

US News

Turning your retirement savings into a flow of predictable income payments is, of course, essential to a successful retirement. It's also often one of the hardest and most overlooked tasks leading up to actually retiring.

Some experts may give different names to the steps of this task, but they boil down to three: your preparation, your buckets and your investments.

Your Preparation

Review 10 or even 20 retirement books and the same preparation steps appear over and over again. Here are the ones common to most approaches:

1. Add up the value of your savings and investment accounts.

2. Calculate how much additional money you can afford to set aside each year.

3. Play with different possible rates of future investment gains and see what your nest egg will look like when you'd like to retire.

[Read: 7 Ways to Turn $250,000 Into Retirement Income.]

4. How long do you think you'll live? Most experts recommend erring on the side of longevity, but your family health history may argue otherwise. For starters, figure you'll be able to pull 4 percent out of your portfolio every year and not risk outliving that income. However, this 4 percent "rule" is increasingly being challenged as too inflexible in today's volatile market environment. Use it as a guide.

5. Factor in Social Security and any pensions you are set to receive.

6. Total your annual retirement income (don't forget to consider taxes).

7. Build a realistic retirement expense budget; consider setting aside a cushion for emergencies.

8. Compare your income and expenses. Perhaps you'll need to tack on some more working years before they balance out. Most likely, you'll need to cut expenses as well.

Your Buckets

Retirement income needs to be broken down into components that achieve different objectives. Some people call these pieces of retirement income buckets; others may call them tiers or layers.

Most experts say you should have a cash spending account that begins with enough money to pay all your expenses for at least several months, and even longer if you can afford it. This will reduce the pressure to sell securities when market conditions are bad. It's also the account into which your retirement income payments will flow, often automatically due to electronic deposit arrangements.

Next, you should think about aligning your guaranteed income with your essential expenses--the things you have to pay. Guaranteed income includes Social Security and pensions. If this income does not cover your basic expenses, many advisers suggest using some of your nest egg to buy the missing piece of guaranteed income.

The most common way is by buying an annuity, but you could also consider buying U.S. securities and using their interest payments to cover the basic expense gap. At the same time, many other advisers prefer to close this basic spending gap with investment earnings from your nest egg. Odds are, you'll earn more money than with an annuity. And while your investment earnings are not guaranteed, you will not have to largely give up control of your funds, which is the case with an annuity.

[Read: Why Mutual Funds Are Getting Cheaper to Own.]

I understand but disagree with this view because it exposes you in declining markets to either selling investments at a loss or reducing your standard of living by cutting basic living expenses. Do everything you can to cover fixed expenses with guaranteed income.

Discretionary spending would then be provided from your investment funds. The thinking is that you could curb such spending if market downturns reduced your investment income. You could even split your discretionary spending into smaller buckets, reserving your highest-risk, highest-return holdings for luxury and whimsical spending plans that wouldn't crush you if your investments fizzled out.

Lastly, you may have a legacy bucket and want to leave money to your heirs.

Your Investments

Once you've defined your income buckets, there is still a lot of heavy lifting to actually produce those regular income payments. Where are all your investments parked? Which ones are taxable and which ones aren't? How do you maximize tax benefits when withdrawing funds? What about those federal rules requiring minimum distributions from IRAs at a certain age? How do they work?

There is lots of good news here for self-directed investors who can't afford or don't want their own financial adviser. It's hardly a secret that millions of baby boomers are entering their retirement years. Trillions of dollars of employee retirement accounts will need to be converted in the coming years into sources of long-term income payments. Investment firms, particularly the big mutual fund companies that manage 401(k)s for millions of employees, want access to this stream of conversions and lucrative long-term investment fees.

[See 7 Mutual Funds That Make Huge Bets]

They have invested heavily to build online retirement planning, investing and retirement spending tools. Many tools are sophisticated enough to reflect tax strategies, different investor risk preferences, and nuances of individual retirement needs. At the same time, investment companies are creating new breeds of retiree investment funds that offer systematic withdrawal plans and other "set it and forget it" funds that generate monthly payouts from investment accounts.

Find the sites that work best for you to help execute the three basic components of your retirement plan. And don't forget to also prepare the needed legal documents that will protect you and your family members if you have an unexpected health emergency: power of attorney, healthcare proxy and living will, and, of course, a final will. Talk about your needs with a legal adviser and key family members. These are essential matters that are best discussed when you're healthy, not after you become ill.

More From US News & World Report


View Comments (54)

Recommended for You

  • Will Apple's digital wallet kill the card swipe?

    Will Apple's digital wallet kill the card swipe? NEW YORK (AP) — Apple wants the plastic credit card to become as rare as the paper check. On Tuesday, the company announced Apple Pay, a digital payment system that lets people pay for retail store purchases using their phones rather than cash or…

    Associated Press
  • Everyone's Past Exposed on this New Website!

    A new site has made it simple to find the truth out about anyone online. It's as easy as typing in a Name and selecting a State!

    AdChoicesInstant CheckmateSponsored
  • Dutch stage tomato fight against Russian sanctions

    Hundreds of young Dutch men and women turned Amsterdam's central Dam square into a blizzard of red goop on Sunday, as they pelted each other mercilessly with overripe tomatoes. The Netherlands vies with Mexico as the world's largest tomato exporter, and it sent $100 million worth to Russia last year.

    Associated Press
  • Asian stocks tumble as China anxiety saps confidence

    By Ian Chua SYDNEY (Reuters) - Asian stocks stumbled to their lowest in five weeks on Monday after a batch of weak data out of China raised the spectre of a sharp slowdown in the world's second-biggest economy. The Australian dollar, considered a liquid proxy for China plays, also took a hammering…

    Reuters49 mins ago
  • More lenders are offering student-loan consolidations

    Dear Liz: I have four private student loans that I would love to consolidate so that I can have one medium-size monthly payment instead of four large ones. Answer: If you have good credit and sufficient income — or a willing co-signer — several lenders now offer private student loan consolidation.…

    Los Angeles Times
  • Hundreds of workers on strike at Lear Corp. plant

    Hundreds of workers protesting what some are calling fast-food-like wages walked off the job Saturday at a Lear Corp. plant in northwest Indiana that makes automotive seats, beginning a strike that could affect a major Ford assembly plant in Chicago. The plant, about 28 miles southeast of Chicago…

    Associated Press
  • CyberArk IPO Gets Boost as Breaches Trigger Industry Gain

    The data breaches that have rocked corporate America in recent weeks couldn’t have come at a better time for CyberArk Software Ltd . The Israeli data security company, which is seeking to raise as much as $80 million in an initial public offering in the U.S., is marketing its shares to investors…

  • Global Banks' Lending Returns to `Substantial' Growth

    Cross-border lending by global banks rose by $580 billion in the first quarter, the first “substantial” increase since 2011, the Bank for International Settlements said. Cross-border claims of banks reporting to the BIS rose 2 percent to $29.4 trillion in the three months through March, the Basel,…

  • Tired of Living Paycheck to Paycheck?

    New website reveals how to save $1,000's when you're living paycheck to paycheck. See exactly how.

    AdChoices Media ForceSponsored
  • Morgan Stanley Seven-Year Curse Spells Decline: Australia Credit

    Morgan Stanley says Australian bonds, the worst-performing government debt in the past month, have further to decline as investment-grade securities globally will stagnate for the next seven years. Australian sovereign debt due in more than a year lost 0.7 percent in the month ended Sept. 12, the…

  • Play

    The Perils of Our Lopsided Income Growth

    The Fed's latest U.S. consumer finance report showed decent income growth overall--but not across the board.

  • Gold Industry Needs ‘Cleansing’ of Weakest, Fidelity Says

    The gold industry, recovering from the worst slump in prices in 30 years, needs more mergers to help improve investor returns and eliminate unprofitable mines, Fidelity Investments said. About a third of gold production is probably money-losing when the price of the metal is lower than $1,250 an…

  • Scottish independence could mean messy divorce

    If Scots vote yes to separation on Thursday, a clock starts ticking down to March 24, 2016 — the independence day declared by the Scottish government. The British and Scottish administrations have agreed that they will recognize the outcome of the referendum and appoint negotiators to work out the…

    Associated Press
  • China's Alibaba sets new path with US IPO

    China's Alibaba sets new path with US IPO New York (AFP) - With a possible record-breaking stock offering, Chinese online giant Alibaba is set to boost its role as a global company with a massive expansion potential. The initial public offering (IPO), expected to raise between $19 billion and $24…

  • If a Company Won’t Talk, Its Former Employees Will

    The Haggler has striven in recent months to get someone at Conn’s, a Texas-based chain that sells appliances and furniture, on the phone. What kind of place is Conn’s, and how does it operate? One of the customers is Justin Raizk of Tucson, Ariz., who last year walked into a Conn’s in his hometown…

    The New York Times
  • American Express® Cards

    Earn Cash Back, Travel, or Points. Find the Card That's Right For You!

    AdChoicesAmerican Express®Sponsored
  • Central banks in driving seat this week

    Three central bank meetings will likely top the agenda for Asian markets this week, with particular focus on the U.S. On Wednesday, the Federal Open Market Committee ends its two-day review and traders are bracing for an increasingly hawkish tone from Fed Chair Janet Yellen. Last week, global…

  • Hedge Funds Cut Bullish Crop Bets to Lowest Since January

    Hedge funds cut bullish wagers on agricultural commodities to the lowest since January before the U.S. Department of Agriculture said Sept. 11. Three months of rain and mild weather created almost ideal growing conditions, spurring price declines that drove the Bloomberg Commodity Index to a…

  • Are You Prepared for a Market Correction?

    When a bull market is roaring, preparing your portfolio for a correction or bear market might seem like closing the storm shutters on a sunny day. Although you don't need a financial adviser to do any of this, you will want to take a page from their book by building in some protection and sticking…

  • Arrium Seeks to Sell $680 Million of Shares Amid Iron Ore Slump

    Australian iron ore producer Arrium Ltd. (ARI) is selling A$754 million ($680) of shares in a further sign of the global washout from plunging prices. “Prices have fallen significantly in the last month to 5-year-lows and there is increased uncertainty over the extent and timing of recovery,” Peter…

  • Bank of Portugal picks new CEO for BES successor Novo Banco

    By Andrei Khalip LISBON (Reuters) - The Bank of Portugal on Sunday picked a new chief executive for Novo Banco, successor to Banco Espirito Santo (BES), following the embarrassing resignation of its three top managers appointed only two months ago. Eduardo Stock da Cunha, 51, an experienced…

  • Retirees' big move (or not): What to consider

    Retirees' big move (or not): What to considerShould I stay or should I go? Many people nearing retirement grapple with this decision. Choosing whether to retire "in place" or move to a new location could make or break your nest egg. There are many factors

  • Often Overlooked Method to Pay Off Mortgage

    If you own a home and pay for a mortgage, you could reduce your payments by an average of $4,100 a year. Here is how it works.

  • Treasury Auctions for the Week of Sept. 15

    Treasury Auctions for the Week of Sept. 15 The Treasury’s schedule of financing this week includes Monday’s regular weekly auction of new three- and six-month bills and an auction of four-week bills on Tuesday. At the close of the New York cash market

    The New York Times