How to Build a Lasting Retirement Income Plan

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual. 

The good news is that the average 65-year-old woman will live until 85 (83 if you’re a man). Many more live longer, which means you may have 20 to 30 years or more to enjoy life away from the daily grind if you retire at age 65.

Now, the challenge: You’ll have to pay for it all.

Retirement income planning: how to get the most out of your savings

Ultimately, to build a lasting retirement income plan, it’s important to minimize risks to your savings so you can get the most out of your nest egg for decades after you leave the workforce. It's a multifaceted, strategic approach that secures your savings so you can generate income efficiently and, most importantly, helps ensure you won’t run out of money, even if you live several decades more.

Risks to your retirement savings

Broadly, there are six risks to address in a retirement plan for living longer:

Longevity

We’ve already touched on this one a bit. But if you live too long, without the right planning, you could run out of money.

Market volatility

A poorly timed market downturn can be a big problem for your nest egg. When you have to sell investments during a downturn, you’ll have to sell more shares to generate the same amount of income. When the market recovers, fewer shares benefit from a rebound than if you had left your investments intact during the pullback.

Inflation and taxes

After years of low inflation, we’ve recently been reminded that the cost of goods can rise over time. As prices rise, your purchasing power declines unless you can grow your nest egg at a brisker pace in retirement. Trouble is, beating inflation often requires taking on more risk with your investments. In addition, it’s impossible to know the future tax environment. If tax rates rise, it’ll take a larger chunk of your taxable income (that includes money you withdraw from your traditional 401(k)).

Health care

It’s no secret that rising health care cost should be a concern. You’ll want to have a plan for how you’ll pay for healthcare and get to know the ins and outs of Medicare—the health care plan that covers all seniors.

Long-term care

Roughly 60 percent of people will need some form of long-term care.¹ A solid plan will account for costs associated with long-term care.

Legacy

Without a plan for what you want to leave behind, you may end up spending down assets that you intended to leave to your heirs. Or, contrarily, you might pull back your spending and limit the things you want to do in retirement in fear you’ll spend assets down too quickly. With a solid legacy plan, you’ll know what you can spend today while being intentional about what you leave behind.

How a retirement income plan helps mitigate the risks to your savings

In addition to long-term care planning, learning the ins and outs of Medicare and setting aside room in your budget for health care costs, a solid retirement plan positions your assets in a way that gives you flexibility to generate the income you need while also mitigating risks by positioning your assets correctly.

While every plan will be a little different, here’s generally how you’ll want to position your assets in a retirement plan for living longer:

Cash reserve

In retirement, you’ll want a pool of cash that you can tap as income. Typically, your reserve is about two years’ worth of income, although it may be more or less depending on your situation.

A cash reserve helps protect against market volatility. This money isn’t affected by market downturns. Your cash reserve provides a cushion to generate income for up to two years without having to worry about these two risks.

Guaranteed income

This is money from Social Security, pensions or income annuities. We call it guaranteed because it comes to you on a regular basis no matter how long you live and is unaffected by the market. Typically, it’s a good idea to have enough guaranteed income to cover essential expenses like food, utilities or other recurring bills.

Guaranteed income helps protects against longevity risk and market volatility: Guaranteed income won’t be affected by market volatility and it helps protect you from running out of money in retirement should you live longer than you expect.

Traditional 401(k) or IRA

These are investments in a tax-deferred account (this could also include 403(b) or other similar account). You won’t owe any tax on these accounts as their value grows, which helps you build your nest egg even in retirement.

Your 401(k) or similar accounts help protect against inflation. By keeping some of your money invested, a portion of your income has potential to grow at a pace that matches or, hopefully, exceeds inflation.

Roth accounts

These investments also grow tax free. Even better: Because your money was taxed before it went into a Roth, you won’t owe any taxes on distributions².

Your Roth account helps protect against taxes and inflation. The investments in your Roth account will continue to grow, helping to protect against inflation, and distributions are generally tax free. Using a mix of traditional and Roth accounts can allow you to create more income without crossing into higher tax brackets.

Whole life insurance

The cash value of whole life insurance will grow over time no matter what’s happening in the market. In addition, as long as the policy is intact, whole life insurance will pay a death benefit to your beneficiaries someday.

Whole life insurance helps protect against market volatility and legacy. Your cash value is essentially another cash reserve (that’s likely to grow more than money sitting in a checking account) because you can access it during down markets³. In addition, the death benefit will allow you to be more deliberate about your legacy.

Traditional investments

These are investments over and above what you have contributed to tax-advantaged accounts like 401(k)s and Roths.

Traditional investments help protect against inflation. On any given day, markets are volatile. But over time, stocks, bonds and other investments have been shown to provide long-term growth. That’s important to a retirement plan because you’ll want to give yourself a raise over the course of what could be a 20-year retirement. Investments help you keep up as prices rise over time.

While this may seem like a lot, your Northwestern Mutual financial advisor can help you build a plan to accumulate and position your assets for retirement. He or she can then help you strategically withdraw from your accounts when you get to retirement.

¹ LongTermCare.gov, Who Needs Care?

² Distributions from a Roth IRA are generally income tax free if they have been held in the account for at least five years.

³ Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.