Updated September 4, 2023, at 2:59 PM

Today, fewer retirees are covered by traditional pension plans, which places a big burden on retirees to fund their retirement with income from personal savings and investments.

Only one in four baby boomers expect significant income from an employer-provided pension. When it comes to generating income from savings and investments, there are several challenges. And if you aren’t prepared, they have the potential to derail your client’s whole retirement income plan.

Retirement Income Challenges

One retirement income challenge is underestimating the number of years a retirement lasts. Your client may live longer than they expect. Retirement could last 30 years or more. For a couple who are both 65 years old, there’s a 25% chance that one spouse will live to age 97.

That makes it a real challenge for retirees to determine how much income they can safely withdraw from their savings and investments without running out of money before they pass.

Another challenge is determining what today’s “safe” withdrawal rate is. Generating reliable income in retirement can be more challenging when interest rates are low. You may not be able to count on traditional approaches to generating retirement income, such as the “4% rule.”

Rolling the Retirement Income Dice

If your client’s withdrawal rate is too high while generating income from their investment portfolio, it lowers the “confidence” level of income lasting over a 30-year retirement.

Assuming an inflation-adjusted withdrawal rate of 4% at retirement and a portfolio allocated 60% to stocks and 40% to bonds; there would be a 30-40% chance that their portfolio would fail to provide income over a 30-year retirement.

There are certainly several different strategies that can be used to turn your client’s savings into reliable income.

Related: Tom Hegna: How Retirement Planning is Changing

Retirement Income Floor Approach

One approach to consider is the retirement income floor approach. This method may help provide your client with a solid foundation for addressing their retirement needs. With this strategy, a minimum level of income (the “income floor”) is established to cover essential income needs. The income floor may be funded from guaranteed income sources like Social Security, pensions, and annuities.

Discretionary lifestyle expenses and legacy planning may be more flexible in nature and may be addressed by investing the balance of their assets in a broad range of investments and insurance products based on their time horizon, risk tolerance, and investment goals.

The first step in this process is to consider your client’s retirement income needs. Determine how much money they’re going to need annually during retirement, or their “income number”.

This will be the sum of their essential expenses, plus the discretionary expenses.

What’s essential and what’s considered discretionary is up to each client. For example, some people may consider golf as an essential income need, while others take a bit more traditional approach.

Examples of what most people consider essential expenses:

• Housing
• Utilities
• Food/groceries/meals
• Basic transportation
• Healthcare expenses
• Insurance costs
• Income taxes
• Other personal expenses like clothing, haircuts, etc.

Traditional examples of discretionary expenses would be things like:

• Entertainment
• Travel and recreation
• Memberships (golf clubs, racquet clubs, etc.)
• Gifts to family
• Donations to charities

Now you have their annual essential expenses and annual discretionary expenses. Add the two together to get their total expenses. This is now their income number.

Total Annual Guaranteed Income

Next, identify what guaranteed income sources your clients have. These income sources would typically be income from things like Social Security, pensions, and existing annuity payments. If they have yet to begin drawing Social Security benefits, this is a great opportunity to explore various Social Security claiming strategies that fit their needs so that you can maximize their future benefits.

Once you’ve obtained the annual income amounts your client expects to receive from their guaranteed income sources, add them up to determine their total annual guaranteed income.

Is There a Retirement Income Gap?

Now it’s time to check if your client is facing an income gap.

See if they have enough guaranteed income to cover their annual essential expenses. This is a priority for many retirees.

Simply subtract the annual essential expenses from their existing annual guaranteed income to determine the essential income gap.

If their essential expenses are greater than their existing guaranteed income, then this is their essential income gap. Filling this gap with another source of guaranteed income is how we can create an income floor.

In addition to guaranteeing all essential income needs, many retirees choose to cover all–or part of–their discretionary expenses as well. It all depends on their personal risk tolerance.

Related: Income Planning vs. Selling an Income-Producing Product

The information within this article is for informational purposes only and does not constitute legal or tax advice. Customers should consult their legal or tax professional regarding their own unique situation. Annuity products and their related features, benefits, and guarantees are backed by the claims-paying ability of an insurance company.