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Income Planning
Benefits of Income Planning
Gain Clarity
Learn how much you can safely spend in retirement and still have what you want leftover.
Gain Peace of Mind
Your portfolio can generate a “retirement paycheck” that reliably covers your expenses.
Minimize Your Taxes
By ensuring that assets are located in the right type of accounts, you can keep taxes to a minimum and potentially save thousands in taxes every year.
What is Income Planning?
Matching your after-tax income with your desired expenses.
Income planning is matching your after-tax income with your desired expenses. If you have too little income you don’t have enough to fund your lifestyle. If you have too much taxable income relative to expenses, you’re overpaying in taxes.
Income Planning also means coordinating your various retirement income sources. On average, Social Security accounts for just 40% of a retiree’s pre-tax income. Most retiree expenses are covered by other sources including Social Security, Pension, Investment income (dividends, interest, capital gains), Rental property income, Part-time work, IRA, and 401k Required Minimum Distributions.
Our Approach
How Farnam Financial Approaches Retirement Income Planning
Build a Budget for You
We start by building a budget for you. A budget does not mean cutting your spending. It means having an awareness of how much is coming in and going out and making sure those values are balanced over time. Many retiree households have had great success making and saving money, but simply don’t know how much they spend.
Coordinate Your Income Sources
Next, we coordinate your income sources in a way that minimizes taxes. We look at all income sources, and the timing of their availability, and create a written income plan that’s specific to you. This ensures you receive the income you want, when you want it, and don’t pay a dime more in tax than you have to.
Follow Rule #1: Don’t Lose Your Money
Rule #1 is don’t lose money. Rule #2 is don’t forget Rule #1! We focus on maintaining your principal. If an investment makes 5% annual income but loses 5% of principal value every year, that investment has failed and jeopardizes your financial well-being. At Farnam, we focus on high-quality investments that have a track record of maintaining their value and producing good income and total returns.
Minimize Your Taxes
It’s important to use a retirement income planner that will also keep your taxes in mind. We use asset location to minimize your taxes. We help position high-tax investments like taxable bonds inside your IRA or retirement account, and low-tax investments like index funds inside your brokerage. This one move can save up to 0.75% of your portfolio value per year in taxes. On a $1 million portfolio that’s $7,500 per year!
Begin taking Social Security at a time that works for you. For individuals born in 1943 or later, each year you defer taking Social Security boosts your annual benefit by 8%.
Dividends are not the only way to generate income from stocks. Income on Demand means you can sell price-appreciated stock for income – allowing you to control when you receive income and how much. You can also significantly reduce your tax bill.
Frequently Asked Questions
I Bonds are issued directly from the US Treasury and are guaranteed by the US Government. Their return is linked to the rate of inflation. Their returns come not from paying interest but from their principal amount being adjusted upward at the prevailing rate of inflation. As of May through October 2022 they are yielding 9.62%. For example, if you buy a $10,000 I Bond and inflation runs at 9.62% for a full year, your principal amount will rise to $10,962 – a return of 9.62%.
There is no fee to buy or hold an I Bond. They must be held for 1 year. If an I Bond is sold within 5 years the investor must give up the last 3 months’ worth of interest.
They’ve been a terrible investment over the past five years. Interest rate hikes caused bond prices to fall significantly in the first half of 2022. Here’s the good news: bond yields have gotten much more attractive. Investors now have the opportunity to buy investment-grade medium and long-term bonds that yield 5% to maturity. These are fair opportunities for retirees drawing 4% of their annual portfolio value.
According to the Social Security Administration, once you reach the age of 62, you begin accruing COLA whether or not you’re receiving benefits. This is true even if you defer Social Security to the age of 70. To be clear – you are eligible to receive 8% benefit increases each year you defer past Full Retirement Age, and also receive COLA on top of it. COLA in 2021 was 5.9% and in 2022 is very likely to be even higher.
The answer is usually no and we recommend caution here. Annuities are insurance contracts that can sometimes lock retirees into high fees and low returns. If you plan on beating the actuary tables with regard to your longevity then it’s possible for the retirement income returns to work in your favor. Financial advisors should be free of financial conflicts of interest, including selling products.
Get in Touch Today
Contact one of our fiduciary financial planners today to learn how we can help you meet your financial goals.