Executive Retirement Planning: How Much Income Will I Need?

January 16, 2006

By Dave Polstra, CPA, CFP®, CIMA® 

Sitting in the office of a 50-year-old successful executive, the conversation begins something like this: “I’ll never be able to afford to retire. After all, just the cash portion of my compensation is $250,000 annually. How will I replace this income?” I gently shift the conversation to a much broader question — “What are the major issues to look at when considering retirement?” I ask. Actually, there are four main issues to think about. Let’s take a look at them one by one.

The first question to answer is “How much do I need?” And the best way to figure this out is to estimate your post-retirement living expenses. Will your mortgages be paid off? College educations for the kids paid for and behind you? Do you have any potential large expenses in the future, like weddings for your daughters or special needs expenses for your grandchildren? Getting a handle on what it will cost you to live is key to answering this question.

The second question to look at is “How much have I accumulated and what type of investment vehicles are my assets invested in?” Make a list of your investment assets; those assets that can produce income and growth for you during your retirement years. Where is the money invested? In a 401(k)? If so, do you have any after-tax contributions that could be pulled out tax free? Are some of your assets in a Roth IRA? How about deferred compensation plans? Do you have a lot of gain in your employee stock options? Do you have funds accumulated in a brokerage account? Will you receive any lump sum compensation when you retire?

Third, what are the income tax implications of withdrawing money from my investment accounts? Believe it or not, your income taxes during retirement will potentially be lower than when you are working. Why? Take FICA/Medicare taxes as an example. Payments from qualified pension plans, IRAs and from Social Security are not subject to FICA/Medicare taxes. Also, with a portfolio managed for tax efficiency, a lot of the income can be either tax-free or taxed at favorable long-term capital gain rates.

The fourth issue to address is, “I’ve got all of these accounts. Where is the best place to pull the money from? And what is the proper order for withdrawing money? Should I pull first from my IRA rollover or from some other investment account?” Here’s where an Income Timeline comes in handy. Take a look at Table 1 where we show an example of when to withdraw funds from your various accounts. In this example, this couple is thinking about retiring at age 60. Their lifetime pension will begin at retirement, Social Security will begin at age 62, and payments from their deferred compensation plan will begin at age 65 and continue for ten years. By making a timeline of their different types of retirement income, they can see when they will need to fill in the gaps with extra withdrawals from their Growth and Income Portfolio or their IRA rollover.

What do you do if you don’t have enough in investments to supplement your other retirement income? Well, you can work a little longer in your present job, or reduce your current lifestyle in order to save more. Still worried that you don’t have enough? Consider consulting or part-time work. In any event, plan today so that you are not surprised after the retirement party!