If you are struggling with retirement planning, I urge you to read the full article at the link below.
What you see in the illustration is a practical, common sense picture of spending in retirement. The main point of the article is that you need different types of investments designed to meet each of the need levels. The first two levels are most important. For example, to meet Essential Needs funds should come from Social Security, a defined benefit pension or an annuity (or combination of all three). In other words, minimally risky assets that you can’t outlive. As you move up the scale, investments may be more risky such as stock investments because while desirable, that money is not essential to your day-to-day living.
I add a few thoughts of my own
- Do not underestimate the need for a contingency fund. One big unplanned expense can throw your retirement plan into a tailspin and jeopardize the other funds
- Plan for inflation. Social Security may provide some help and some annuities have inflation adjustments (but they cost you upfront), but basically you are on your own so plan how your income or spending will cope.
- Don’t forget survivor income. This may come from your legacy fund, life insurance or survivor benefits under Social Security or your pension or annuity.
The safety-first school of thought was originally derived from academic models of how people allocate their resources over a lifetime to maximize lifetime satisfaction.
“In developing Modern Retirement Theory, financial planner Jason Branning and academic M. Ray Grubbs create a funding priority for retiree liabilities. Essential needs are the top priority, then a contingency fund, funds for discretionary expenses, and a legacy fund. They illustrate these funding priorities with a pyramid. Building a retirement strategy requires working from the bottom to properly fund each goal before moving up to the next.
Their pyramid is recreated in Figure 1. There is no consideration of discretionary expenses or providing a legacy until a secure funding source for essential needs and contingencies is in place.”
Article in Forbes.com by Wade Pfau. Source: What Is a Safety-First Retirement Plan? – Retirement Researcher