Retirement planning vs. retirement income planning: What's the difference?

Author: Retirement daily guest contributor

Source: The Street Retirement

It may be an uncomfortable topic, but you must be certain that you’ll be able to save money and generate the income you’ll need during retirement – regardless of market fluctuations that could impact your finances.

Here are some tips to accomplish this:

Know the difference between retirement income planning and retirement planning

Retirement planning is thinking about the things you want to do in retirement, like traveling, golfing, and gardening. Retirement income planning considers how you’ll pay the bills when you stop working. It includes order of asset disposition and management of income streams, which can be derived from the assets noted above, and can include rental income, part-time work, or business sale.

Start early

It’s wise to start as early as age 25 or 30 by adding to your savings account and participating in a RRSP, getting a company match if possible. Then, start considering retirement income five or ten years before you plan to retire. Develop models online and/or work with a financial professional. If you’re not close to meeting your financial goals, take steps to improve your situation. These steps – which will depend on your goals, status, and circumstances – might include increasing your savings, delaying your retirement, getting a part-time job, restructuring your expenses (such as downsizing your home), or a combination of these things. All of these steps can impact your retirement income projections.

Determine how much money is “enough.”

The amount you’ll need to fund your retirement depends on numerous factors, including your age (the younger you are, the more money you’ll likely need), your lifestyle, and your monthly expenses. Use a cash flow sheet to outline your monthly budget, including mortgage, property taxes, car payments, groceries, etc., then add expenses like travel, as well as college and wedding payments. Also, be sure to have a liquid emergency fund.

Create a financial health “road map,” and if you get off track, determine how to fix it. Start by gathering a summary of your assets and expenses. Run some projections, which will tell you where you are relative to your goals, similar to an actual road map. If you are short of meeting your goals, take actions to help catch up, such as increasing your savings, reducing expenses, working a second job, etc.

Have a guaranteed income stream

Whether you have a regular income flow from a pension, rental properties, or something else, you want guaranteed money coming in each month regardless of what happens to the market. This is critical to ensure that a fixed portion of your budget is accounted for every month.

Build a plan that works no matter what

You need a plan that will work no matter what happens with the market – or in your life. If you depend solely on stocks, for instance, and the market plummets as it did in 2020, you may not have the time to wait for the market to fully recover, as you did when you were younger. You also need to plan for unexpected emergencies, such as getting sick and being unable to work prior to your planned retirement. Your plan should include having proper insurance, including disability, life insurance, and long term care. Also, maintain access to cash, whether it’s in a bank, a reserve equity line, or a life insurance policy.

Don’t make macro assumptions

Don’t just think, “I have $1 million, I’ll be fine.” Consider inflation and other risks, your regular expenses, and anticipated “extra” expenses, like travel or college payments. In addition, you need to account for longevity risk – living a long time – and sequence of return risk, which are impossible to predict. No one knows how long they will live, and market returns are also affected by events beyond our control.

Statistically, people are living longer now than they were 50 years ago. Today, it’s not unusual for people to live until age 100+, meaning they may be retired for almost as long as they worked. Instead of assuming a lifespan to age 80, you may need to consider how much money you’d need if you live to age 100, which is 25% longer.

The average RRSP balance may not be enough to allow you to maintain your preferred lifestyle, so talk to your financial adviser about your retirement goals, and determine a plan to help you achieve (or exceed) these goals. You may need to save more money, retire later, think about a part time job, or implement a combination of these things. Since this is not a one-size-fits-all solution, working with a financial professional can help you determine what will work best for you.

Protect your money

What if you’re in a car accident and you get sued? If you don’t have the proper umbrella liability insurance, this lawsuit could drain your savings. Be certain that you have proper strategies in place to protect your assets. Other risks include disability, injury, property damage, or needing to help a family member in need, among other things.

Suppose you get an unexpected illness. Before this happens, you’ll want to go through a “mental checklist,” knowing that if you become disabled, you have disability insurance. If you die from the illness, your family will be protected because you have life insurance, and if you’re unable to work anymore, you have long term care insurance. The illness is scary, of course, but perhaps it’s slightly less frightening when you’re properly protected for any scenario. No matter what happens, you have peace of mind knowing that you have the proper protections in place.

Work with an experienced financial professional that you like and trust

Interview experienced financial professionals, check their references, collect referrals from friends and family. When you select a financial professional, you should have complete confidence in their knowledge, experience, and capabilities.

This article was written by Retirement Daily Guest Contributor from The Street Retirement and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.