A retirement income plan is a year by year timeline that shows you where your retirement income will come from. It can be done on a sheet of graph paper, or quite easily in an Excel spreadsheet (or other spreadsheet program). Here is how you create one.
Your retirement income plan needs to contain the following information:
1. Headings In Your Retirement Income Plan
Start your retirement income plan with one column for each calendar year, with your respective age and spouse’s age recorded under each calendar year. This goes out through life expectancy. (Here is a Sample Retirement Income Plan to use as an example. You will need to blow it up to at least 200% to read it.)
2. Fixed Sources Of Retirement Income
Add rows for each source of income such as:
- Your Social Security, showing the amount starting in the year/age you choose and continuing through life expectancy.
- Your spouse’s Social Security, showing the amount starting in the year/age you choose and continuing through life expectancy. (Keep in mind that upon the first death, the surviving spouse keeps the larger of their own social security or their spouse’s, so if one spouse has a shorter life expectancy, your retirement income timeline should account for this expected decrease in income upon the first death. See Key Things To Know About Spousal Social Security Benefits for more details.)
- Your pension(s), showing the amount starting in the year/age you plan to take it. A separate row is used for each source of pension income.
- Your spouse’s pension(s), showing the amount starting in the year/age you plan to take it. A separate row is used for each source of pension income. (Make sure you account for survivor options if survivor will not receive 100% of the amount. See Pension Benefit Decisions for information on lump sum vs annuity and survivor income choices.)
- Annuity Income: Input this only if you have an annuity that will pay you a guaranteed minimum amount starting at a specific age or date, with the payment continuing for life, joint life, or for a set period of time. (See Should I Buy An Annuity if you're wondering if this is right for you.
- Earnings: If you plan on working part time, input earnings for the year you plan to work. If take social security before full retirement age and have earnings in excess of the earnings limit, your social security will be reduced. (See Earning More Than The Social Security Earnings Limit for details.)
- Other: Input any other fixed or regular sources of income such as rental income.
- One time sources of income: input expected lump sums, such as life insurance proceeds, an inheritance or process from sale of a piece of property.
3. Desired Gross Retirement Income
Now add a row for your desired gross annual retirement income. Gross means including taxes, so, for example, if you wanted to spend $40,000 a year, your desired gross income should be about $50,000 a year, leaving $10,000 available to pay income taxes. (Tax rates will vary depending on your total income and deductions. You are encourage to do tax planning each year to accurately project this. See 3 Ways To Do Your Tax Planning to learn how.)
4. A Line Item To Calculate The Gap (or Surplus)
Next, your retirement income plan should calculate the gap or surplus each year from your fixed sources of income compared to your desired gross income.
Total each year’s gap or surplus for each calendar year from expected retirement to life expectancy. If this is a negative number, this is what you would need to spend from savings to have your desired retirement lifestyle.
If the total is a surplus than you have enough fixed sources of income to meet your desired retirement lifestyle.
This simplistic retirement income plan does not account for inflation or investment returns, but it gives you a great year-by-year outline of where your retirement income will come from.
Attached is sample done in an Excel spreadsheet. (See Sample Retirement Income Plan. You'll need to blow it up to at least 200% to read it.) In this sample, desire gross income is inflated, and the spreadsheet calculates the present value of investment needs to fund the gap between desired retirement income and fixed sources of income.
Next, you need to create an investment plan.