The Flooring Approach for Retirement Income

If you're looking for a retirement income strategy which you cannot outlive that covers your essential expenses each month, consider the flooring approach.

The flooring approach involves splitting your monthly retirement expenses into essential expenses and discretionary expenses.  Although definitions vary, many would consider taxes, groceries, housing costs, healthcare costs, and insurance premiums as essential expenses, while considering vacations, charitable donations, cable TV, pet expenses, and dining out as discretionary expenses.

Once you have estimated your monthly essential expenses, determine if your existing sources of reliable monthly income such as Social Security benefits and defined benefit (DB) pension payments are enough to cover them.  If not, you can bridge the monthly income gap using an income annuity with either a single-life, life with period certain, or joint and survivor payout option, therefore raising your monthly income "floor" to cover your monthly essential expenses.

As long as the U.S. government, the company sponsoring your DB pension plan if you have one, and the insurance company through which your income annuity was purchased remain solvent, you will receive enough income each month to cover your essential expenses, regardless of what the markets are doing and regardless of how long you live.  If your essential expenses rise during retirement, since DB pensions and income annuities are usually not inflation-adjusted, you may need to utilize additional income annuities to once again raise your monthly income "floor" to cover your monthly essential expenses.

Using the flooring approach, only your discretionary expenses each month must be funded by taking distributions from your accounts such as IRAs, Roth IRAs, 401(k)s, 403(b)s, 457(b)s, and so on.

If you are a prospective client and would like to learn more about hiring us for a financial consultation, where, among other things, we would help you develop a retirement income plan, please visit our Schedule Meeting page.



Mike McErlane, DO, MBA, CFP^®, CFA^®, RICP^®, EA, MCEP^®

Mike McErlane is the owner and founder of Comprehensive Financial Planning for Doctors, LLC based in Frisco, Texas.

Comprehensive Financial Planning for Doctors, LLC (CFPFD) is an Investment Adviser registered with the Texas State Securities Board.  Registration of an Investment Adviser does not imply any specific level of skill or training.  CFPFD only transacts business in states or jurisdictions in which it is registered or exempt from registration.  A copy of CFPFD's current disclosure brochure is available through the Securities and Exchange Commission's Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

The opinions and analyses described are subject to change at any time without notice.  Any information is considered general and is not intended to provide any specific advice or recommendations.  Your use of the information is at your sole risk.  You should consult with your financial advisor, attorney, tax advisor, insurance agent, or other professional advisor before taking action on any information or implementing any strategy.