How to Create a Retirement Income Plan

A retirement income plan is a timetable that is broken down into years and shows you the various sources from which your income in retirement will come. You can do it on a piece of graph paper or quite easily in an Excel spreadsheet. Both options are available (or another spreadsheet program). You may make one by following these four simple procedures in the right order.

Key Takeaways

You can build a retirement income plan that is quite similar to a budget, but its purpose is to forecast your spending requirements over an extended period of time.
Your retirement income can come from a wide variety of sources, and the specifics will vary depending on who you ask, so it is essential to take into account the whole picture.
There are a lot of other aspects of finances that can shift over time, such as your tax liability, the rate of inflation, and the returns on your investments; these aspects are not included in the model.
If you know how much revenue you'll have over the course of time, you'll be better able to plan for both the expenses you anticipate incurring and those that come up unexpectedly.

Create a Model for It

Your plan for your income in retirement should begin with one row for each calendar year. Next to each year's row, you should list your age (and, if you are married, the age of your spouse). Consider the individual's expected lifespan while making this forecast. At the very bottom of this piece is a table where you may see an example of a retirement income plan to look at. Create headings for each column that you will be adding to the list. Consider the items on the following list when deciding what to include.

Identifying the Fixed Income Sources During Retirement

Include columns for each of the following sources of fixed income:

Your Retirement and Social Security

Indicate the amount beginning in the year or age at which you plan to begin receiving benefits, and indicate that it will continue for the remainder of your life expectancy. As a result of the individual's intention to begin receiving benefits on the individual's 66th birthday, which falls in the middle of the year, the sample at the bottom of the page shows that there is a half year of Social Security at the age of 66.

The Social Security Number of Your Spouse

Indicate the amount that will start accruing in the year or age at which your spouse will begin receiving benefits and continue doing so throughout their expected lifespan. Keep in mind that in the event of the first death, the surviving spouse receives whatever portion of their own or their spouse's Social Security benefits is greater. This is true even if there is an age or health gap between the two of you. This indicates that if one spouse has a shorter life expectancy, your timeline for retirement income would only include the larger Social Security amount after the expected longevity of the other spouse had been reached. This is the case even if the shorter life expectancy of one spouse is expected to occur later in life.

Your Pension (s)

Indicate the amount that will begin to be deducted beginning in the year or age that you intend to do so. Every type of pension income has its own dedicated column in this spreadsheet. The timing of when you begin taking distributions from retirement accounts, pensions, and Social Security payments can have an effect on the total amount of money you get from those sources. Check with your plan advisor or visit the Social Security Administration website to find out whether the rules apply to you.

Your Spouse's Pension (s)

Income From an Annuity

Only input this if you have an annuity that will pay you a guaranteed minimum amount beginning at a specified age or date, with the payment continuing for life, joint life, or for a set period of time. If you do not have such an annuity, skip this section.

Earnings

If you intend to work part-time, you should enter your earnings for the years in which you intend to do so. Don't forget that if you claim Social Security benefits before you reach your full retirement age and have earnings that are higher than the earnings limit, your benefits will be reduced. Because of this, you may need to adjust the amount that is listed in the Social Security column based on the earnings you anticipate having in the future.

Other

Include any additional fixed or recurring sources of income, such as rent or alimony payments, in this section.

One-Time Revenue Generation Opportunities

Enter any one-time sums that are anticipated, such as the money from a life insurance policy, an inheritance, or the net proceeds from the sale of a piece of property. Do not include any income streams derived from investments, such as dividends, interest, or gains on capital. Instead, you will utilize your retirement income plan to determine how much money you will need to take out of your various accounts in order to fund your retirement. Check out the 1,000-Dollar-a-Month Rule when it comes to withdrawals to backward-engineer how much you need to save for retirement.

Include all of the Expenses, Including the Taxes

Next, calculate an estimate of the overall annual cost of your living costs. Include in separate columns things like a mortgage that might be paid off in a few years, such as the amount remaining on the loan. You can see that the mortgage will be paid off halfway through the year 2025 in the illustration at the bottom of the page. As a result, the total annual mortgage payment will be half of what it was the year before, and then that expense will be eliminated. Your marginal tax rate will change depending on the overall amount of your income and the deductions you claim. It is advisable to undertake tax planning on an annual basis in order to have an accurate projection of this. My illustration shows that the only form of savings this individual has is an IRA. Any withdrawal they are required to take must come from their IRA, and the money they take out will be considered taxable income. They collaborated with their tax planner and utilized their retirement income timeline to arrive at the conclusion that they would require a gross IRA withdrawal of $35,000 when they reached the age of 66, which was their first planned year of retirement. This conclusion was reached after they had worked. Approximately $3,100 of that amount will be applied toward tax obligations. The following year, they will have a higher income from Social Security, and they projected that they would only require a withdrawal of approximately $15,000 from their IRA. Their financial advisor predicted that their total tax liability for that year would be approximately $3,300. They carried on with the balance of their prediction based on that number.

Determine the Difference

The following step is for your retirement income plan to determine the gap, which can either be a shortfall that needs to be covered by savings or an accessible surplus that can be placed into savings. In our illustration, we first add up the various sources of income (Social Security and pension), and then we subtract the various costs of living (living expenses, mortgage, and estimated taxes) to arrive at the negative amount of -$34,693 that is displayed in the first row beneath the column that is labeled "Gap." If this "Gap" shows a negative value, it indicates that you will need to withdraw this amount from your savings and investments in order to maintain the standard of living you had envisioned for your retirement. If the "Gap" shows a surplus, this indicates that you have sufficient stable sources of income to maintain the lifestyle you want throughout retirement. You have the option of increasing your savings or spending a little more than you had planned.