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What Is Your ‘Income Stability Ratio’?

Descending the retirement-income mountain.

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Regardless of how long you’ve been saving and investing for the future, it is likely that you’ve focused primarily on your investments’ returns. Baby Boomers have traditionally been trained to think about “climbing up Mount Everest,” ascending higher by accumulating assets and increasing net worth.

But as we get older and start to approach retirement, far fewer people—consumers and financial advisors alike—are focused on “descending” the mountain and converting assets into an ongoing, sustainable income that will last for as long as it is needed.

The Three-Legged Retirement Income Stool Has Become Unbalanced

In the past, many retirees could count on income from three primary sources—pensions, Social Security, and personal savings. These are oftentimes referred to as “the three-legged stool.”

With a defined-benefit pension plan, retired employees could rely on a set amount of income, typically for the remainder of their lifetimes. (And in some cases, some or all of that income would continue for a surviving spouse).

Social Security was another primary source of income for yesterday’s retirees. When this program was initially put into place in 1935, there were more than 40 workers paying into the system for every one retiree collecting benefits. This is not the case anymore.

For retirees in the past, any income that was generated from personal savings and investments was oftentimes just icing on the cake. And because life expectancy was shorter several decades ago, none of these income sources had to last very long.

But today it’s a different story.

First, due to the expense of paying out lifetime retirement benefits, many companies have done away with the traditional pension and replaced it with the 401(k). While there can be some nice aspects of investing in a 401(k) plan, going this route has shifted the responsibility for generating income in retirement away from the employer and entirely into the hands of the individual employee.

Second, while retirees today can still count on Social Security, this may not be the case for long. One of the primary reasons for this is because there are far fewer workers paying into the system today to support each recipient. In fact, the current ratio is less than three workers paying taxes for every one Social Security income recipient.

And according to the Social Security Administration, this benefit is only intended to replace about 40 percent of an average wage earner’s pre-retirement income. (That percentage is even lower for those earning higher wages.) 

Given all of that, personal savings and investments have had to play a much larger role in ensuring that you have income in retirement, and that the income will last for as long as you need it to. In order to do so, it is necessary to start positioning assets and thinking about how to generate cash flow. 

Are You Ready to Descend the Retirement-Income Mountain?

The truth is that when you’re retired, a successful and stress-free financial future has much more to do with how much income you are generating—as well as for how long. This requires a totally different mindset from what we’re used to.

There are a number of ways to generate income and essentially “replace” your employer’s paycheck when it comes time for you to retire. These income-producing strategies can include annuities, dividends, bonds, and income-producing rental real estate.

To learn more about the importance of lifetime income, as well as some of the strategies that should be considered, you can visit the Alliance for Lifetime Income at allianceforlifetimeincome.org.

In drawing up your future income plan, it is also essential to ensure that your principal is safe and that you are able to reduce or eliminate any taxes that may be due, as this can provide more money for your living expenses. The more income you can guarantee, the better.

When working with clients, financial advisors who specialize in income planning may initially work to determine your “income stability ratio.” This ratio is a proprietary calculation developed from one of many software programs income advisors use, and it compares the percentage of retirement income that is being generated from known or guaranteed sources versus the percentage that is dependent on market performance.

As an example, if you need $10,000 per month in retirement and you have a 90 percent income stability ratio, that means $9,000 of your monthly income is guaranteed, and the remaining $1,000 is dependent on the whims of the stock market. With that in mind, the higher your income stability ratio is, the less stress you should experience. 

By running a financial plan now to see where your income stability ratio is, there may be things you can do now to increase your ratio.

Unfortunately, those who are not familiar with how to protect their incomes are oftentimes the ones who end up taking the most risk with their savings and putting the most pressure on their portfolios—and themselves!

How to Work toward a Viable Retirement Income Ratio

Because not everyone will have the same retirement-income needs, it is important that you work with a financial advisor who can guide you through the process of protecting your savings and converting an appropriate percentage into a guaranteed income stream.

Likewise, working with a professional who is familiar with the LGBTQ community can also help you construct your future income stream based on the benefits that you are eligible for, either as a single individual or with your spouse or partner.

This article appears in the February 2019 edition of OutSmart magazine.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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