Retirement Income planning

What does your personal, written income plan look like?  Mind you, this is different from an investment plan.  This plan should account for the different risks that come with the income phase of your life and it will dictate what your investment plan looks like.  You can't have an investment plan when you are in the income phase of your life without having an income plan first. 

The de-cumulation phase, or phase of your life where you start withdrawing income from your accounts offers a much different set of obstacles then the accumulation phase.  As you are growing your nest egg and accumulating as much money as possible to be used in retirment the three factors that play the largest role in how much money you will have available are: 1. your average rate of return 2. how long were you invested in the market 3. how much money did you contribute?

When you begin withdrawing money from your account you are faced with 3 additional risks that most planners do not take into account.  The average retirement plan looks something like this.  "If you average 4% return per year and take out a constant 5% then you will run out of money at age 90."  "However, if we can average 5% return and take out a constant 5% then you will not run out of money until age 95." 

Planning in this fashion might have made sense for previous generations but it does not make sense today.  You are not accounting for 3 potentially fatal risks to the plan.  The first risk is the sequence of returns risk.  This is not a risk while in the accumulation phase of your life, but it is a huge risk in the de-cumulation phase.  I can show you how you could acheive your goal returns and still run out of money years prior to what the plan indicated because of the sequence of returns risk.  

The second risk is income risk.  If you don't account for this risk there is a real chance that your standard of living might decrease while in retirement.  Most people will take a fixed percentage of the value of their account each year in retirement.  If the account value is fluctuating lower that means your income has gone down from one year to the next. 

The third risk is longevity risk.  It is a statistical fact that we are living longer than we ever have.  We must account for this and most plans do not anticipate a life span equal to what actuarials will tell you is realistic for a healthy, retired couple.  As a result, your retirement plan might actually have you running out of money long before you are deceased.