First Person: My Three Point Retirement Plan

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Sometimes retirement planning gets turned into something more difficult than it needs to be. Having recently spent time working with several baby boomers on their retirement plans, I've begun to realize this. Rather than try to come up with fancy retirement plans or systems, or make the whole process overly-complicated, I've found that whether it comes to my own retirement or helping someone else with theirs, there are typically three points to my main retirement planning preparations.

Expense Tally

A complete tally of all expenses might seem rather common sense, but if that's the case, why is it that so many people haven't done it as they near retirement? In fact, one of the boomers I've been working with on retirement planning had no real idea of what her monthly expenses were until we sat down with a spreadsheet I had created and we added them all up.

While an expense total can be a reasonably easy thing to create in our current lives in which we deal with expenses on a regular basis, it can become more complicated when trying to judge such items in retirement, even if that retirement is just a few years off. A few of the items that we had to work on for this particular boomer's retirement expense total that weren't so easy to figure were items like Medicare, supplemental insurance costs, property taxes (adjusted for a senior exemption discount), vehicle insurance after downsizing by two vehicles, travel, and entertainment expenses. Such items can be tough to predict since they can vary greatly once in retirement. Therefore, we really just had to take our best guesses at a few of them in our attempt to put together our cost estimates.

Investment Income

From Social Security and pension plans to IRAs, 401(k)s, bonds, and savings, I consider all these items investments. While some people might consider Social Security an entitlement program, if I've paid into it and it earns me income of some sort, I consider it an investment. Either way though, there are forms of income -- investment or not -- that must sustain us in retirement. With a variety of such income streams, it can be hard to get a feel for their total impact. By totaling up what these various lines of income will provide during retirement, I can get a good feel for their combined effect. For example, taking numbers like $1,400 a month from Social Security, $500 a month from an IRA, $400 a month from bond income, $300 a month from an annuity, and $200 a month from savings and CDs might not seem like a lot individually, totaled, they can provide nearly $3,000 a month in income.

Differential and Drawdown Plan

So once I have a good idea for income versus expenses in retirement, I can then make an overall comparison between the two and begin working in earnest on my retirement drawdown plan.

For example, if I know that total expenses are going to be $3,600 a month in retirement, and I know that income from investments is going to around $2,800, that leaves me with a gap of $800 that needs to be made up either by way of part-time income or by drawing from investment totals. With this total, I can then begin to determine how and where I'd like to draw this additional money from based upon minimizing it's affects on my investment income while at the same time not over-utilizing my liquid cash accounts.

This process could involve breaking my drawdown into portions. For example, I might earn $300 from part-time work or having a garage sale, take $200 from liquid savings, $200 from my IRA balance, and cash a $100 savings bond that had matured or that was earning very little interest. This way, I'm won't be sucking too much out of higher interest earning accounts in an effort to supplement the differential between income and expenses.

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