When it comes to retirement planning, one of the most common concerns we hear is, “What if I run out of money?” Many individuals, even diligent savers, hesitate to spend their hard-earned savings because they fear depleting their resources too quickly. Today, we’re exploring how to create a retirement income plan that balances your needs and wants, using a real-world case study of Tom and Chelsey.

The Difference Between Needs and Wants

In retirement, expenses can generally be divided into two categories:

• Needs: Essential living expenses such as housing, food, utilities, and healthcare.
• Wants: Discretionary spending like travel, gifts, dining out, and hobbies.

Understanding this distinction is the first step in creating a retirement income plan. For Tom and Chelsey, their goal was to cover $12,000 per month in expenses, including both needs and wants.

The Case Study: Tom and Chelsey

Tom and Chelsey are a couple turning 65, with $3.5 million in savings:

• $750,000 in taxable investments
• $2.5 million in IRAs (formerly 401(k)s)
• $230,000 in cash reserves

They approached us with a default plan: start Social Security at age 65 and delay withdrawals from their IRAs as long as possible. While this plan was feasible, it had drawbacks, such as higher taxes later in retirement due to required minimum distributions (RMDs). Our goal was to refine their strategy to provide consistent income, reduce taxes, and maximize long-term security.

Building the Income Plan

We crafted a plan focused on:

1. Delaying Social Security: By waiting until age 70 to start Social Security, Tom would receive 8% annual growth on his benefit, maximizing their guaranteed income for life.
2. Creating Immediate Income: To cover the five-year gap before Social Security begins, we recommended a single premium immediate annuity (SPIA) funded with $670,000 from their taxable investments. This provided a monthly paycheck of $12,500 for the next five years.
3. Ensuring Lifetime Income: We proposed using $1 million from their IRAs to purchase an indexed annuity with a lifetime income rider. This guarantees $9,000+ per month, starting at age 70, for as long as either Tom or Chelsey lives.
4. Reducing Taxes: The structure of the annuities allowed for lower taxable income during the early retirement years, leaving room for strategic Roth conversions to further reduce taxes.

Why This Works

This plan addressed Tom and Chelsey’s biggest concerns:

• Guaranteed Income: They now have predictable income streams, covering their expenses without worrying about market fluctuations.
• Tax Efficiency: By delaying RMDs and utilizing taxable investments first, they reduced their future tax burden.
• Peace of Mind: With a well-structured plan, they no longer need to under-spend out of fear of running out of money.

Lessons for Your Retirement Plan

Whether you’re nearing retirement or already retired, there are valuable takeaways from this case study:

• Start with your spending needs and work upward to calculate your income requirements.
• Consider delaying Social Security for higher lifetime benefits.
• Use annuities strategically to create reliable income streams.
• Work with a financial planner to minimize taxes and optimize cash flow.

What’s Next?

In our next post, we’ll explore how Roth conversions fit into Tom and Chelsey’s plan, further enhancing their tax efficiency and legacy planning. Stay tuned!