3 Reasons to Prioritize Income Over Assets

Why is Income More Important than Assets in Retirement Planning?

This question is crucial for retirees. After all, retirement can last for 30 years or more, and mistakes can lead to significant financial complications.

In previous discussions, we’ve highlighted how income planning differs from investment planning, particularly with its emphasis on generating monthly income. Unlike the working years, when accumulating assets and replenishing them with employment income is possible, retirement is a phase of “distribution,” where we rely on our nest egg for income. Seniors don’t have the luxury of replenishing their savings through employment. For this reason, among others, focusing on retirement income is paramount.

Here’s why income should take precedence over assets in retirement planning and why this approach might benefit your planning strategy.

1. Income Ensures a More Efficient Planning Framework

Income, as it pertains to cash flow, allows for more efficient financial planning. While income is a well-understood component of retirement finances, cash flow management is equally crucial. Cash flow management involves using income streams to cover retirement expenses. This includes:

• Diverse Income Sources: Retirement plan distributions, Social Security benefits, guaranteed pension payments, annuity payouts, and part-time employment income.
• Income Timing: Effectively managing when money is received from various income sources and using it to pay bills and expenses punctually.
• Expense Management: Ensuring adequate funds for various retirement expenses, including fixed monthly costs, discretionary spending like vacations, and unexpected emergencies.

By relating income to expenses, focusing on monthly income can enhance planning efficiency. Nobel laureate Robert C. Merton points out that in the current retirement planning landscape, where many depend on 401(k)s and other defined-contribution plans, decision-making is often influenced by behavioral biases.

When retirement planning emphasizes assets, it prioritizes asset values and investment returns, which are distinct from monthly income. This difference complicates the setting of cash-flow goals and the assessment of their achievability.

2. Income Aligns Better with Retirement Spending Goals

Forecasting retirement spending is another essential aspect of planning. This involves estimating future expenses and ensuring sufficient funds to cover them. Unlike the working years, retirement introduces new financial priorities and risks, with income uncertainty being a primary concern. This is the risk of outliving your money.

When we consider Social Security benefits or pension distributions, we speak in terms of income. Similarly, when discussing spending objectives, we focus on income—what amounts will be needed to cover various expenses. In contrast, when discussing 401(k) plans or other investment vehicles, we talk in terms of net worth and asset growth.

Because monthly income is more directly tied to specific spending goals in retirement, it serves as a more tangible and practical planning marker. It allows retirees to set clear objectives and measure their progress in meeting their financial needs.

3. Income Creates a Better Framework for Managing Retirement Finances

Most retirees rely on multiple income sources. According to the Social Security Administration, Americans aged 65 and older receive the majority of their income from four primary sources. If a retirement portfolio is one of these income-generating vehicles, making prudent investment decisions is crucial.

Dr. Merton also notes that investment decisions are often based on emotional biases rather than solid, objective analysis. Prioritizing income as a retirement goal can bring clarity to financial planning. It allows retirees to identify potential income gaps and determine the best solutions to fill those gaps. In contrast, focusing primarily on asset values can lead to less disciplined decision-making.

For example, in a downturn, investors might be tempted to sell off assets to avoid further losses. However, this can result in realized losses and diminished future income. Maintaining a focus on generating reliable income helps prevent such emotionally-driven decisions, promoting a more stable and secure retirement strategy.

Implementing an Income-Focused Retirement Strategy

How do you know if your current retirement strategy prioritizes income sufficiently? At SafeMoney.com, we connect you with experienced financial professionals who can assess your strategy and suggest improvements to help you achieve your goals.

By focusing on income, you can create a more resilient and adaptable retirement plan. This approach helps ensure that you have the necessary funds to cover your expenses, regardless of market conditions.

Exploring Different Income Sources

To effectively manage retirement income, it’s essential to diversify income sources. This can include:

• Annuities: Fixed annuities, immediate annuities, and indexed annuities offer various income guarantees and levels of risk protection.
• Social Security Benefits: Understanding the optimal time to claim Social Security can maximize your benefits.
• Pension Payments: If you have a pension, coordinate its distributions with other income sources.
• Part-Time Employment: Working part-time in retirement can provide additional income and keep you engaged.
• Investment Income: Managed portfolios, dividend-paying stocks, and bond ladders can offer supplementary income.

Tailoring Your Retirement Plan

A personalized retirement plan should consider your unique needs, goals, and risk tolerance. Work with a financial professional to develop a comprehensive strategy that integrates various income sources and provides flexibility to adapt to changing circumstances.

Conclusion
Focusing on income rather than assets in retirement planning offers several advantages. It provides a more efficient planning framework, aligns better with spending goals, and creates a more stable and manageable financial strategy. By prioritizing income, retirees can ensure they have the necessary resources to enjoy a secure and fulfilling retirement.

For personalized advice and to ensure your retirement plan prioritizes income effectively, connect with a financial professional at SafeMoney.com. Use our Find a Licensed Advisor section to find an independent financial advisor and request a strategy session. For any questions or concerns, or call us at 877.476.9723.