The retirement income gap is simply the difference between your budget and your guaranteed income sources. For example, if you have a budget that requires $5,000 per month of income in today’s dollars, and you have guaranteed income from social security and pensions of $3,000 per month then your gap is $2,000 per month. 

One of the ways you can create the greatest amount of confidence in your retirement income plan is to solve for the gap using strategies that have the least amount of volatility. Each solution to solving for this gap has varying degrees of risk. If you are ultra conservative, then you might consider laddering certificates of deposit and living off the interest income to cover the gap. Or maybe you ladder annuity contracts and create guaranteed income using annuities.  

If you are willing to assume more risk perhaps you would prefer to buy a diversified portfolio of individual corporate and treasury bonds and live off the income while planning to hold the bonds to maturity, or maybe if you are comfortable with even more risk you consider buying a diversified dividend paying stock portfolio and only live off the income that is generated and never touch the principal.  

Many ways exist to build a portfolio to solve for the gap, but the important thing is that you have a plan in place, you understand the risks associated with your plan, and you stick with the plan in good times and bad.  

Getting caught up in the euphoria of the markets is easy. In good times, we get greedy and want more. In bad times we want more safety and just don’t want to lose our principal. If you don’t stick with the plan, then you will always be shifting from one great idea to the next and will end up with very little confidence that your plan will work.  

Most of the people we serve are very conservative. They want to have a high degree of confidence that the numbers are going to work regardless of market conditions and so we tend to design plans starting with the most conservative options first and then, depending on each clients appetite for risk, we can assume more risk.  

Retirement is all about cash flow not your net worth. Your income is what will allow you to enjoy the lifestyle you have worked hard for. I believe designing a plan with the highest probability of success and the least amount of volatility helps most people feel better about their retirement income plan. Be sure you find and adviser who will help you create a plan the way you want it done.

Also featured in the July 2013 issue of the Kitsap Peninsula Business Journal.