The 2 Thieves of Retirement Income

Easy-to-Ignore Considerations that Could Cost You a Lot of Money

How much income will you need once you retire?

Our clients who are reading this know that answering that question takes some digging.

That’s because we work with quite a few people who were once do-it-yourselfers—conscientious, smart individuals who’ve saved well—but who, after long, successful careers, came to the realization that there’s a lot more to retirement planning than merely saving “X” number of dollars and calling it a day.

When you’re ready to retire, your financial concerns multiply. You may find yourself worrying about things you never had to consider before. Without proper training or support, you’ll be faced with more questions than answers.

That’s a problem. It’s a problem because questions, uncertainty or delays during retirement can cost you money at a time when it’s extremely difficult to recover from a loss.

Some do-it-yourselfers turn to one-size-fits-all formulas that promise if you only spend a certain percentage of your retirement assets each year, you’ll surely be okay.

But that’s almost never the case.

There is no magic formula that works for everyone, or that can protect you from the incalculable number of possibilities you may encounter.

That’s because there is no single formula that can:

  • Address all your retirement tax planning needs
  • Manage all your debt
  • Assess all your risks
  • Provide you with estate and legacy planning recommendations
  • Explain how to cost-effectively sequence your retirement account drawdowns
  • And, can manage all your investments

Everyone’s retirement income needs and concerns are unique. And, perhaps just as challenging, those needs are fluid and will change over time.

Before you retire, and before you can build an actionable retirement plan, you need to:

  • Know exactly what your fixed retirement expenses will be
  • Accurately calculate your retirement income
  • Eliminate as much debt as possible (Including your mortgage.)

It’s all about planning, and proper planning takes information. While there are other factors, if you can make a list that satisfies the bullets above, you’ve taken an important first step toward achieving your goals.

With that in mind, what are two key (but often ignored) factors you need to consider when calculating your retirement income needs?

1) Focus on Inflation

Barely rating as an afterthought, poor, neglected inflation almost never gets invited to the “Retirement Income Needs” prom.

But while you may not have time for inflation, inflation most definitely has time for you.

Inflation is the increase in prices which results in a steady decline in your money’s purchasing power.

Think it doesn’t matter? 40 years ago, when many of you were in your teens or 20s, an ice cream cone at the drug store was $.10. And you could buy a hamburger, fries and a Coke at McDonald’s for about $1.00.

Inflation is very real, and it will almost certainly have a big impact on the value of your money.

Here’s a simplified example: If the U.S. averages a 3.0% rate of inflation for 10 years, that’s about 30%. If you make $100,000 a year right now, and you retire tomorrow knowing your yearly income will remain at $100,000, 10 years from now your money will actually be worth just over $70,000.

That’s serious stuff.

And sure, while Social Security (if it survives) might get a bump, most retirement accounts don’t have a mechanism to help you keep up with inflation. Plus, unfortunately, that Social Security bump will likely be but a drop in the bucket compared to what you’ve lost to rising prices.

This is why you must make sure you eliminate debt, diversify your investments, preserve capital, and work to ensure that your money continues to earn income. Because if you end up, say, spending half your savings in the first 10 years of retirement, and then you lose 30% more to inflation? You could be in real trouble.

2) Understand Your Future Tax Liabilities

Along with inflation, one of the most mismanaged aspects of non-professional retirement planning has to do with future tax liabilities.

While there’s an almost limitless number of scenarios I could use to illustrate my point, here’s something I recently saw: A middle-class retired couple, late 60s, was living off of Social Security, a small pension, and, to keep their tax burden low, some money they were withdrawing from a brokerage account. They also had considerable money in an IRA from a rollover that they’d proudly yet to touch.

Is this a great situation, or a great big problem?

While the scenario above sounds good, and while it kept their current taxes to a minimum, this couple was setting themselves up for a huge tax shock when the husband turns 70½ and has to begin taking required minimum distributions (RMDs) from his IRA. That’s because, currently, their income places them in a 12% tax bracket. But because they didn’t understand the tax implications of his IRA, they’re going to be forced to start taking sizable RMDs ($50,000 over three years) that will actually bump them up into the 22% tax bracket.

Going from the 12% to the 22% tax bracket is an 83% marginal increase!

Doing some calculations from their tax returns, I realized they could have withdrawn $20,000 additional dollars each year from the IRA and still remained in the lower bracket. What they should have done was transfer $20,000 annually from his IRA to a Roth IRA, which would have locked in a 12% tax rate, and then when the RMDs come calling, the balance of the IRA would be smaller and the amounts they’d be forced to withdraw reduced, thus lessening their tax burden.

Simply, a lot of extra money that still could have been theirs was soon going to be Uncle Sam’s.


When it comes to retirement preparation, it’s never just about the money you’ve saved or how it’s invested.

Of course those things are important.

But saving well and then not following through by working with a professional, credentialed, fiduciary advisor is like scoring three runs in the first inning, but not scoring any more runs the rest of the game.

Great starts are terrific, but you also need to focus on finishing strong.

For questions about creating strong retirement plans, or any topic related to retirement planning or investing, contact us today.