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If you are retired or expect to be in the near future, what is your primary concern (planning issue) income or spending?
‘Once retired, managing spending may be easier than trying to adjust income, but many people see expenses as the main issue.
‘’What is your opinion?
Maybe the question should be asked a different way.
Funds available to spend*, or spending? Top priority in retirement.
*Funds available to spend = income (however you chose to define it)+Assets(however you choose to define it)
Regarding Income: It is not what you get that counts. It is what you get to keep, after taxes.
Regarding Spending: In retirement, it varies from person to person, and varies throughout retirement. I favor the retirement “smile” where spending in retirement may be higher in the “go-go” years immediately after work ends, less once a person has exhausted their bucket list, the “slow-go” years, and more in the “no-go” years due to increased medical and custodial care spending.
But, different strokes for different folks.
So much depends on health (of the retiree and the spouse, and other family members), whether income sources are indexed for changes in price (no, not inflation) such as Social Security, longevity, etc.
Primary concern is tax management!
Thanks Dick! The question was thought-provoking enough to get several differing views. For myself, it came down to a Chicken and Egg analogy. One without thought to the other seems like an endless battle in futility. I set a budget for spending and then allocate the income to meet it. I then determine if I won or lost each year by the change in my Net Worth. The game is then about the adjustments made to prolong the effort until it is no longer needed or no longer matters.
But would you agree you need sufficient income first to be able to allocate toward your budget?
After retirement which is easier to adjust if necessary, spending or income?
You really want to die on this hill, don’t you, Dick? 🙂 I think nearly everyone agrees it’s about expenses in retirement. You adjust your income to meet your expenses. As long as your expenses are no more than 4-6% of your portfolio, after other sources of income, you’ll probably never run out of money.
Didn’t you just support me? “As long as your expenses”. You assume 4-6% of the portfolio after say SS, is sufficient to cover all expenses.
So if my portfolio is $1.5 million, don’t i need to be sure expenses for next 25-30 years can be funded on 4-6% of that?
What if after retirement growing expenses exceed that? How do i adjust income?
If i have $1 million plus SS aren’t my expenses limited to about after tax $40,000 plus SS benefits? If i want to retire and cover all types of spending don’t i need to focus on the income i can reasonably generate?
It seems like you’re just being argumentative. This isn’t difficult. As your expenses increase or decrease throughout retirement, you take more or less out of your retirement accounts. As you age, you can take a higher and higher percentage without risk of running out before you die.
This isn’t productive. I’m out.
Agree. This is just a ( typical) Quinn rabbithole where he bangs on about “income” without any appreciation that it can be flexed considerably for a lot of retirees.
I suspect that’s because he is from part of the population that got used to living it up ( at progressively better levels as earning rose) on most of what they brought in. His 100% income replacement theory is a clue to that.
But that view is entirely ignorant of the reality that many people who do not have the luxury of padded DB pensions face. They not only have to decide how much they need to stack away in various vehicles before they can afford to retire but also how to manage the drawdown of that to meet expenses. And the fact that if they take Quinn advice on guaranteed income they may never get to retire at all.
Hey, you got it‼️
”have to decide how much they need to stack away in various vehicles before they can afford to retire”
Exactly, the ability to generate income is the priority.
I had nothing to get. I don’t believe that you get it at all though. By your arguments in this thread and your flip flopping around what income is.
And you’re still attached to your antiquated idea of “generating income”. If you can’t express your argument in terms of income and capital then it seems you are not operating on the same level as everyone else in this thread.
At best we now seem to have got to a position that Mr Micawber articulated far better and more succinctly ( do catch the Peter Capaldi turn in the excellent Ianucci version).
Just take higher percentage? Assuming from an adequate pool of assets to begin with, right?
Here is how my AI friend defines retirement income.
Retirement income is basically the cash you’ll use to live life after you hang up your work hat. It comes from different places like:
Unfortunately, this might be another example of the problems with AI.
Income has several characteristics that can help you understand the concept. First, its source is from outside your family entity. Any funds that are part of what you already own are not income. And, in fact, only a portion of an annuity represents income, the rest is a return of your own funds. And, generally, as a cash basis taxpayer, you have to have received the funds. Income can be earned as in wages or salary, unearned as from rents, dividends, interest etc. Things we receive such as rebates are not income.
Life would be simpler for you if you stopped using the word income without also using a qualifying word such as taxable, net, gross, or real etc.
Instead, as I have mentioned in several replies to various articles and comments, you should use the term cash or money. We all know what that is, either in the form of the folding stuff or amounts in our bank or brokerage accounts. We don’t pay our bills with income, we pay with some form of cash. To be retired, we have to have enough cash on hand, or coming in to pay our expenses. The way this is planned is called cash flow analysis. There are many sites on the internet where you can learn about how to do this.
Dick, it seems to me I can’t escape considering both sides of the equation during retirement, just as I do now while working. Glad to hear you made it to MA.
The more I think about this question, the less sense it makes. Take my situation, which I imagine matches Mr. Quinn’s.
I have a pension with no COLA. That income is fixed but declining in purchasing power.
I have Social Security, with a COLA. That income is fixed but increasing, hopefully to match inflation.
I have taxable funds that generate interest and dividends. That income is variable. I have been reinvesting it, but I could spend it.
I have tax-sheltered funds from which I take RMDs. That income is variable. I have been reinvesting it in taxable funds but I could spend it.
I could spend from my capital.
In other words, the size of my spendable income is, to a considerable extent, within my control.
The monthly fee for my CCRC, and my insurance premiums, are fixed expenses that increase yearly. I need to buy some groceries, gas and a few new clothes. Otherwise, my expenditure is within in my control.
So I control a lot of my income and a lot of my expenses.
On the other hand, consider someone whose sole income is Social Security, who is unable to work and has no financial assets. Either she keeps her expenditure within her Social Security payment or she goes into debt.
I think you proved my point. All the income sources which you accumulated while working and which now generate your retirement income is what allow you (and me) to live as you like and pay your expenses in retirement. If you didn’t have those sources, you might not be able to afford the CCRC and I sure would not be able to write this from our vacation home. Building income sources is most important in retirement -IMO.
I think semantics may be sucking us in a bit.
So the question, Which is the most important IN retirement.
My take is that the things I did prior to retiring determined my retirement income. Our Social Security claiming strategy, building our IRA balances, and a couple dinky DB pensions. It’s fixed, little I can do about those things now.
So now that I’m IN retirement it must be about expenses, of which I have way more control.
My point is that income and expenses are two sides of the same coin.
So saving for retirement is important. Got it.
This whole discussion is pointless, in my opinion. Quinn seems to be saying, you should have access to enough money in retirement to pay your expenses. Why is this a discussion topic?
The point of contention is that Quinn insists on focusing solely on income generated during retirement to fund retirement expenses while ignoring/excluding one’s ability to draw down their assets to partially or even entirely fund their retirement expenses. See, for example his response to me where he states that whatever income a person generates in retirement is what determines the ability to spend.
That is not the case at all. Drawing from assets in retirement is income is it not?
Income that can be generated in retirement is the result of saving and investments generated while employed so the income ones earns from working allows investments to generate income in retirement.
How we got off on a tangent defining income is beyond me. I never implied income was only from employment.
Today is the first of the month and like the first of every month my Fidelity accounts were credited with interest from money market accounts and from bond funds. While I reinvest the money currently, I just as well could have it transferred to our bank account and spend it. Thus it is income to be used for expenses. I wish the IRS did not consider it income.
The money used to purchase those investment funds in the first place was acquired through employment income before retirement.
Definition of income includes from employment or investments.
There are two pots, money that can be spent and spending. All I ever said was that money that can be spent (income) should be the prime focus planning for retirement because spending after retirement can be adjusted if necessary which I say is easier than trying to generate more income (from any source) after retirement.
It seems like a simple concept – but it appears only true for me.
I don’t think you really understand the meaning of “drawing from capital”.
” Money that can be spent” does not equal ” income” in most basic accounting views of the world. And if you truly believe it does then you have done a disservice to everyone by asking an utterly pointless question.
I’m convinced. I’m comforted to realize this year’s RMD is not income because it is a lump sum withdrawal.
All I did was use the term income and then it was made complicated by others.
Seems to me everything on my 1040 is income-even tax free interest.
I don’t know if you’re being sarcastic. You’ve just posted a poor AI definition of income in order to justify yourself.
Absolutely you didn’t make clear in this thread or any others where you were talking about “income” that you meant basically everything including sales proceeds on the family dog if necessary.
Maybe there is a lesson here in defining what you want to talk about precisely. Or maybe a red flag for those that try to engage with you in good faith.
I never considered there was a need to define income when using it in relationship to covering all spending in retirement. Some of the comments amaze me.
‘’The only point of this was to say that you can budget, plan and anticipate retirement expenses and it will mean nothing unless you first assure adequate income.
I don’t know how that can be any clearer or simpler.
By what has been said here is if a person lived in retirement taking their annual RMD alone they would have no income. That’s rather silly.
“The only point of this was to say that you can budget, plan and anticipate retirement expenses and it will mean nothing unless you first assure adequate income.“
First, how do you know what “adequate income” is if you don’t estimate expenses?
Second, it’s likely there will be years in my retirement that I report $0 income on my 1040, but spend $70k+. That’s why it’s important to define what you mean by income.
Finally, if your definition of retirement income is just the money we use from various sources to pay expenses, then your statement is so obvious, it goes without saying.
But it works the other way too. I could look at my interest and dividends and decide I could afford one of those jet-around-the-world trips. Equally, my hypothetical Social Security only person could look at her income and decide to move to a lower cost of living area. Six of one….
OK my last attempt.
Imagine you’re in the first morning of accounting 101. Think about the difference between income and capital and why it is important to measure both. And how you might distinguish between categories of expense based on whether they are ongoing/ recurring or one offs
And why that might matter when making decisions.
Maybe explain how a start up business survives and makes payroll (expense) when it has zero income.
Now think of retirement as a start up project. Except it’s one without future funding rounds ( except inheritance or lottery wins). How do you best set up for lasting the course until the great eternal buyout? It’s easier of course because the grim reaper doesn’t need to see boosted valuations and growth projections as long as you’ve survived.
That’s modern retirement.
Imagine that you are 55 and your employer has decided that you should take early retirement. Furthermore, assume that due to various other factors, other employment isn’t available or desirable and that you are going to retire. You have a taxable account, and a tax deferred account that you cannot easily access until you are 59.5. How will you live until 59.5?
Your income will only be whatever dividends and interest are paid into your taxable account. After reviewing your spending for the past four years you determine that your expenses will be 2.5 times the amount of dividends and interest your taxable account will earn.
But, it isn’t the amount of income that determines what you can spend. You can always make withdrawals of capital to fund expenses.
This was in fact my situation 20+ years ago. In order to cope with stress this kind of situation can create you need a flexible thinking process that lets you look at your financial assets in their entirety. During the 4.5 years until you reach 59.5, your assets as a whole will likely grow despite your capital withdrawals from your taxable account. So, you need a broader definition of “income” which includes the changes in the total value of your financial assets. This is called using a Total Return approach.
So, during the first 5 years of my retirement, we lived on withdrawals from my taxable account. Despite these withdrawals, our total financial assets grew by 31%. During this period, our taxable income was really low.
So, you don’t need taxable income to fund spending. You don’t need income at all. You just need enough assets to pay your expenses, and an asset allocation plan for your investments so that some of them can grow.
I don’t really get the question. I plan to manage my income in order to reduce my taxes, which is an expense, so I guess the answer to your question is spending.
We all know what expenses are. But what is income? That may be obvious when we’re working — it’s our paycheck — but it’s far less clear once we’re retired. If I’m living in whole or in part off a pile of savings, my “income” isn’t the dividends and interest I collect. Indeed, focusing solely on dividends and interest has the potential to lead to bad financial decisions as folks, say, blindly buy the highest-dividend stocks or chase Wall Street’s latest high-yield contraption. Instead, “income” will depend on retirees’ portfolio withdrawal rate, and what that means in dollar terms will depend on how they invest and how markets perform. Moreover, as folks draw down their savings over their retirement, they amount they withdraw each year — their “income” — may be far more than their dividends and interest. Thus, I’m not sure talking about income, unless it’s very carefully defined, is all that useful.
“Thus, I’m not sure talking about income, unless it’s very carefully defined, is all that useful.”
Bingo.
Agree. We have a pension that is clearly income but it doesn’t cover everything, which means our expenses are met in part by our portfolio. This is partially in the form of regular (though not “steady”) distributions of dividends and capital gains, but must also include some intentional spending of assets. I suppose when money leaves an investment account and goes to an account we spend from, it could be called “income” but it isn’t really.
I would say that is exactly what it is, income. If while working you received a salary, a bonus or even stock options, it’s all income.
In retirement, you may have a pension, SS, dividends and interest, withdraw gains or from assets or any combination and that’s all income too.
Not according to the IRS. And indeed not according to me either, as it’s money that I already have. But rather than debate what income is, we can probably agree with Jonathan that “Thus, I’m not sure talking about income, unless it’s very carefully defined, is all that useful.”
So your definition of income in retirement is whatever we spend?
I guess that’s a way to look at it, However, what I am actually saying is your income in retirement (from any and all sources) limits what you can spend in retirement- without going into debt.
If you want to spend $10,000 a month in retirement, you better have $10,000 in net income. If you can only generate $8,000 net income a month then you must cut your spending goal.
So, income is the primary driver in retirement IMO.
tautology
noun
tau·tol·o·gy tȯ-ˈtä-lə-jē
pluraltautologies
1a: needless repetition of an idea, statement, or word
Rhetorical repetition, tautology (‘always and for ever’), banal metaphor, and short paragraphs are part of the jargon.
—Philip Howard
b: an instance of such repetition
The phrase “a beginner who has just started” is a tautology.
2 logic : a statement that is true by virtue of its logical form alone
A logical combination of sentences that is always true, regardless of the truth or falsity of the constituent sentences, is known as a “tautology.”
—Rudy Rucker
… now the objection was raised that the entire theory of natural selection rested on a tautology: “Who survives? The fittest. Who are the fittest? Those that survive.”
—Ernst Mayr
… a public service announcement from the Department of Redundancy Department. 😉
Both definitions apply, but I was referring more to the logical definition. “Retirement income is more important than expenses. How do you determine retirement income? From expenses. How do you determine expenses? From income.”
I thought there was agreement that it is important to establish a steady income stream even when comprised of several different sources.
My income is steady and mostly fixed so there is no doubt my expenses fit into that income. I guess I don’t understand how it would be different if income stream is constructed differently unless we assume there is flexibility by just taking more from retirement assets.
Most guidelines for retirement spending allow for folks to gradually reduce their retirement assets at a rate doesn’t reduce their standard of living. Doing so typically involves spending both income (e.g., SS, interest, dividends) and accumulated capital assets. Why do you object to that approach?
I don’t object to any approach. All I’m saying is that whatever income a person generates in retirement is what determines the ability to spend.
Why don’t you acknowledge that income generated before retirement also determines the ability to spend? As an extreme example, consider a billionaire retiree who keeps all of their money in a safety deposit box. That person clearly is able to spend large amounts every year despite generating no income in retirement.
Of course that’s true. And also determines the ability to accumulate assets for retirement i suspect
I thought you were making a distinction between accumulatig income during retirement as opposed to accumulating assets for retirement.
Because the hypothetical person in my example doesn’t generate any income in retirement, your response contradicts your previous comment that “whatever income a person generates in retirement is what determines the ability to spend.”
Many working-age families live with fluctuating incomes, whether it’s the result of bonuses, the availability of overtime or the chance to take on a second job. Why should retirement be any different? I’ve heard of lots of retirees who pull less from their portfolios during rough financial markets or when interest rates drop.
But at those times when less is drawn from portfolios, I would expect that spending is affected. Likewise if there is an increase in spending, more revenue must be found – if possible. I’m just saying it is easier and less risky to build off available income to plan spending.
But what counts as “available income”? That may be crystal clear to those who have a pension plus Social Security. It’s far messier for those who are living off their portfolio.
Yes! We are in the first year of retirement and will have to live some from our portfolio vs having a large pension. We will have a small pension and SS for “available income” that is fixed and will need to draw the rest. It is kind of scary to think that our portfolio might need to last 30 years. Chris
I like the previous comments, but the nature of your question allows various perspectives. That said, here’s my perspective: If you’re retired (or soon expect to be) it seems like many people will have limited options to increase their income after they’ve retired, while expenses are something you may have a bit more control over going forward. So it seems to me that income has to be considered primarily before retirement (while you may still have a chance to make changes to improve it), and expenses are something you may have more ability to adjust during retirement. Of course, there’s many exceptions to my point, but I think it’s generally true for a fair share of retired folks (especially those who retired income is primarily their social security and/or pension). For people who retired with significant assets, then their main (financial) concern during retirement may well be managing those assets (hence income). So I guess a persons’ primary (financial) concern between income or expenses during retirement may well be determined by their financial status when they retired.
I think you are saying what I am saying Regardless the source of income – pension or withdrawing from accumulated assets, it’s income that needs to be focused on. You need to know that the $1 million you have in a retirement account will generate so much income. You must then have expenses that will be covered by the income the $1 million can generate or you need more income.
I think the folks who deliberately prepared for retirement by saving money and eliminating debt will approach this dilemma from either direction depending on their mindset. It’s kind of like the argument about the chicken or the egg.
Then there are those who never bothered having a retirement strategy. Will they blissfully sail through retirement in the same manner as during their working years?
I dunno.
Absolutely. While I won’t have a defined income I hope that giving myself a spending budget will give me the comfort to spend up to that level without concern ( recognising that frugality in the accumulation years may continue in later life). Whether I call that spending budget or ” notional income” is simply mental gymnastics. I won’t be drawing it if I’m not spending it.
So you are saying that spending is limited by income? I agree, but how is that different from the maximum income you can generate limiting your spending?
I can plan my spending/expenses in great detail, but what good does it do without first considering what income I can reasonably generate in retirement?
What am I missing?
As previously, capital reserves which will increasingly dominate fixed income for upcoming retirees.
See SWR discussion as previous.
I feel you’re probably framing the question too narrowly in making it one or the other and ignoring the other biggie capital reserves.
IMO it is always about spending. One doesn’t have to spend all income but uncontrolled overspending can obviously lead to issues. Equally makes sense not to deprive oneself of a need (vs a want) while there is surplus in the capital tank.
For a person reaching retirement, they should probably not be in the position that recently minted adults face in their early years of work where income is all they have and there may be complex juggling around rent/ mortgage/debt/ overdraft.
As we’ve now discussed in a number of threads the “concern” about spending/expenses often comes from unhedged inflation. You need to have a plan for that and the answer is not always “more income”. It might be more strategic/ tactical drawdown of capital.
Exactly. What I consider to be my income consists of a non-COLAed pension and Social Security. But I also have a portfolio which generates interest and dividends, and from which I have to take RMDs. I haven’t been spending them, but they could be considered income. And if I spent them and still needed more money I could sell assets from the portfolio. Is that then income, or not? And it is under my control, unlike my pension and SS.
While both need consideration, it seems to me income is most important. You either match income to desired spending or base spending on available income. If I know my reasonable expected income throughout retirement, I have no choice but to match spending to that income.
I’m already mentally thinking of you as Richard Quincome ;).
This is probably just rehashing a discussion had elsewhere. Income is all if it’s all you have. But even then it isn’t perfect for framing things unless it is entirely index linked ( and to the indices which matter for your personal spending inflation).
I don’t disagree that prudent personal finance should match spending to income ( though I might prefer the term “financial capacity”). But then it’s also important to recognise that not every $ spent is the same. A replacement car might last 10+ years and reduce running costs by $1000s a year. A cruise’s financial utility expires after you’ve bored the last friend with your photos.
And yes I’m being facetious with the last example because memories might ultimately be more important than possessions.
I would say every dollar spent from my available income is exactly the same when it comes to deducting from income.
Let’s try again. Say you need a new car. Do you only buy on finance because then you can keep payments within your income? Or do you say the cost is above my income (after the rest of my annual expenses) but this is the sort of thing ( infrequent, major purchase, hopefully forecast) I am comfortable spending capital on?
I like “financial capacity.” We do not match our spending to our income, but we are within our financial capacity.
Realistically, unless there’s hyper inflation and the stock market collapses or there’s a civil war or there’s nuclear war, or there’s a collapse of the logistical pipeline due to the preceding events, or there’s mass die off due to a pandemic, or anything else catestropic such as drastic climate change, why should I worry if I have sufficient income to live comfortably?
I don’t worry about money….but true black swans do kind of worry me!
Not much planning left to do at this point. Our income stream should be mostly predictable, the main variable being my part-time earnings. We aren’t notching up our lifestyle in retirement. I guess neither is a “concern.”
The obvious answer is both, neither, and it depends.
The American College’s Retirement Income Certification Program (RICP) has a goal of training financial professionals to “build sustainable, holistic, and integrated retirement income strategies for every client situation and income style”.
A good FP looks at both sides of the equation. With fewer retirees having traditional pensions, the task of converting retirement savings into a steady income stream has become more important. Smart planning decisions (SS claiming, annuitizing, health insurance, housing, tax efficiency…) can make a big difference in a retiree’s standard of living.