One of the most difficult things to do is plan for the unknown. This holds true for retirement income planning. You don’t know how much income you’ll need once you stop earning a paycheck; you don’t know how long you’ll need it; you don’t know how many people you might need to provide for (such as adult children returning home…with grandchildren); and you don’t know how much to plan for in terms of medical expenses and/or long-term care. Even if you do make reasonable estimates, you’re planning for a moving target that can change at any time.
Sometimes it’s best to plan for the worst case scenario, because that way you’ll have ample funds if all goes well (or reasonably well). One good rule of thumb is to live on less than your means. Doing this throughout your career can allow you to save more for retirement, and doing so during retirement can help you continue to save a cash cushion for those rainy days. As an added bonus, one of the great philosophers in history – Socrates – also believed that living below one’s means was the secret to happiness. “The secret of happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.”
Most retirees receive retirement income from a variety of different sources, including an investment portfolio, Social Security, pension and/or 401(k) plan, an IRA, and maybe an annuity. The goal is for income sources to last throughout your (and your spouse’s) lifetime.
One way to facilitate this is to ensure that one or more unexpected events don’t drain your retirement accounts. To do this, you might want to create a few “buckets” of ready assets. For example, one bucket could be a separate cash account earmarked for emergencies. A second bucket should be liquid enough to use for short-term expenses such as replacing the roof, buying a new car or going on vacation.
It’s also a good idea to have a third bucket into which all of your regular retirement income sources are automatically deposited, preferably one that provides online access, free checking, free checks, free transfer services, and an ATM or no-fee debit card. You can use this account to pay for everyday living expenses, be it a bank checking or brokerage account. In addition, by utilizing a bank or broker-issued credit card linked to this account, any cashback rewards you earn may be automatically deposited there. If you anticipate holding a large amount of cash in this account, bear in mind that the Federal Deposit Insurance Corporation provides coverage for individual bank accounts only up to $250,000 per institution.
Living within your means is difficult enough. During retirement, one of the easiest ways to track your income and outgoing expenses is by bucketing your assets