Retirement income planning: matching money to bills for life

Income planning is a worksheet, not a product. Here is the worksheet.

Retirement income planning answers one question: will the money that arrives every month for the rest of your life cover the bills that arrive every month for the rest of your life? Everything else, including every product anyone might sell you, is downstream of that answer. This page walks through the worksheet we use with Monterey County pre-retirees, the decisions that move the numbers most, and where an annuity does and does not belong.

Next Wave Options is an independent, insurance-licensed agency in Salinas. We can build the worksheet with you and place life and annuity contracts where they fit; we do not manage investments, and when the plan needs an investment or tax professional, we say so.

Step 1: the must-pay column

List the expenses that have to be paid every month whether or not the market had a good year: housing (mortgage or rent, property tax, insurance), utilities, food, transportation, health insurance premiums and predictable medical costs, and any debt payments. Be honest and use real numbers from the last twelve months of statements. Add a line for the things that are not monthly but are certain, such as a roof or a car, spread over the years. This column is the number the rest of the plan has to cover.

Step 2: the guaranteed-for-life column

List the income that will arrive every month for life regardless of markets: Social Security for each spouse, a CalPERS, CalSTRS or other pension, and any annuity income you already own. Two decisions here move the numbers more than anything else in the plan.

When to claim Social Security

Claiming before your full retirement age reduces the monthly benefit permanently; claiming later, up to age 70, increases it. For a married couple the higher earner's decision also sets the survivor benefit. The Social Security Administration shows your own figures at each age; run them before you decide, because the difference between 62 and 70 is large and irreversible. Many California public employees have reduced or no Social Security because of how their public employment interacts with federal rules; the SSA statement shows what applies to you.

Pension survivor elections

A CalPERS or CalSTRS pension asks you to choose between a higher benefit that ends at your death and a lower one that continues to a survivor. That election is usually permanent. We will help you read the options and put them into the worksheet; we will not tell you which to choose, and we are not affiliated with either system.

Step 3: the gap

Subtract the guaranteed column from the must-pay column. If guaranteed income covers the essentials, the rest of your savings can stay flexible and take market risk, because a bad year does not threaten the mortgage. If it does not, the difference is the gap, and it is the only number an annuity should ever be sized to. Our retirement income calculator does this arithmetic and shows how the gap changes with claiming age.

Step 4: filling the gap, in order

1. Delay Social Security if you can afford to. It is the only inflation-adjusted, government-backed lifetime income most people can buy more of, and the price is simply waiting. Bridging the years with savings is often the best use of a lump sum.
2. Choose the pension option deliberately with the survivor's needs in the worksheet, not just your own.
3. Consider an income annuity for the remaining gap, and only the gap. An immediate or deferred income annuity converts part of a lump sum into a monthly payment for life. That is its genuine purpose, and it comes with genuine limits: the money is no longer liquid, most contracts carry surrender charges for a period of years, withdrawals above the free amount are charged, and indexed contracts cap the interest credited. The insurer's guarantee rests on its own claims-paying ability. Putting more than the gap into an annuity trades flexibility you may need for income you do not.
4. Keep the rest flexible. Emergency reserves, savings for the roof and the car, and investments belong outside any contract. What those investments should be is a question for a registered investment adviser, not for us.

What the worksheet does not fix

Inflation raises the must-pay column every year while a fixed pension or annuity payment does not rise with it; Social Security does. Health costs rise faster than most other lines, and long-term care can dwarf all of them; the California Department of Insurance's senior information guides cover long-term care insurance neutrally. Taxes fall on withdrawals from pre-tax accounts and on some Social Security benefits. And the order in which good and bad market years arrive matters for money you are withdrawing from, which is the real argument for keeping the essentials covered by guaranteed income rather than by hope.

How we do it with you

1. One conversation about everything, in English or Spanish: statements, the Social Security estimates for each spouse, the pension options, the bills. Forty-five minutes.
2. The worksheet, in writing, with the gap at two or three claiming ages.
3. Options for the gap, in the order above, with any annuity shown next to the alternative of leaving the money where it is, and with its surrender schedule on the page.
4. Your decision at your pace. Nothing here has a deadline except the pension election, and that one deserves the time.

Related: annuities for the contract types, 401(k) rollover options for what to do with an old plan, and public employees for CalPERS and CalSTRS.

Questions people ask about retirement income

Reviewed by Roberto Morales, California Insurance License #0G97165. Next Wave Options is licensed for life and annuity products only and does not provide investment, tax or legal advice.