First Person: Employing the Retirement '4-Box Strategy'

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A recent article on The Wall Street Journal's MarketWatch.com discussed Farrell Dolan's (a principal at Farrell Dolan Associates) "4-box strategy" for retirement income and expenses. It notes, "The four-box strategy, as Dolan describes it, involves breaking down lifestyle expenses and retirement income sources into two sets of two boxes-and then matching up those boxes to maximize the odds that a retiree's savings supports him or her for life."

After reading the article, I found myself liking the idea in theory and realizing that it was somewhat similar to my own approach, but different too. However, it is something that with a little tweaking, I might be able to incorporate into my own retirement.

Employing the strategy

So as I understand it, the general idea behind the 4-box strategy involves breaking income and expenses into parts. These parts consist of essential expenses, discretionary expenses, lifetime income sources, and income from assets. Lifetimes income sources like Social Security or a pension are used to cover those essential expenses like a mortgage, utilities, food, and health care costs. Meanwhile, income from assets like savings, a retirement plan, or side income can be used to cover discretionary costs such as entertainment, travel, meals out, and more non-essential expenses.

Adjusting it to fit a long-range retirement plan

While the 4-box strategy could be a good one for those nearing retirement, what about people like me? With likely 30 years to go until retirement, no pension at the moment, and possible cuts to Social Security looming in our future, I might have to make some adjustments to this strategy. Without these income sources -- or such income being available in lesser amounts -- I might have to change how this plan fits a retirement taking place several decades from now. But overall, I still like the idea behind this retirement strategy. So how could I mold it to better fit my situation?

Potential changes

It's not likely that I'll be getting a pension. And I don't foresee major changes to Social Security that will suddenly have me reaping more in benefits than currently estimated. Therefore, I will likely have to focus on the other aspects of the 4-box strategy for changes.

First off, adjustments to expenses are typically easier to make than finding more income. Therefore, beyond just cutting discretionary retirement expenses, which would likely be the first move to reduce costs, I can make changes now to help as well. By eliminating debt, and keeping it that way, I can hopefully reduce some of those essential expenses as well. We've worked hard to pay off our mortgage through making extra payments and downsizing homes, and with housing costs being one of the largest expenses in many budgets, if we can remain mortgage free entering retirement, it could significantly lighten the load when it comes to our essential costs.

Second, focusing more on the income from the assets portion of the plan will likely be necessary. But magically making investments pay more isn't always that easy. I can't really control interest rates on things like savings and certificates of deposit or make the stock market go up or down. Therefore, I've made two decisions. The first decision was to move my retirement account savings into a dividend reinvestment fund. Not only does this build share total over time through monthly dividends being reinvested in the plan, but it can be used as a regular source of income -- drawing upon the dividends as a monthly check -- in retirement. The second decision revolves around working part time in retirement. This will help bolster regular income, and in a bind it can help cover essential expenses; and should there be excess, this money can go toward discretionary expenses.

In these ways, I hope to mold the 4-box strategy to better fit my particular retirement situation.

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Disclaimer:

The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.

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