Learn · Replace · 5 min
The Income Floor
That's a much more useful way to look at retirement than starting with a $2 million portfolio and asking, "Is that enough?"
You know what your retirement accounts are worth. But do you know how much of next month's life is already paid for before you touch them?
Say your life costs $10,000 a month.
Between Social Security and a pension, $7,000 shows up every month. That leaves $3,000 that needs to come from your investments.
That's a much more useful way to look at retirement than starting with a $2 million portfolio and asking, "Is that enough?"
Because now we know what the portfolio actually has to do.
Start with the month, not the balance
For most of your working life, the balance mattered because you were building it. Your paycheck handled your life and your investments were mostly left alone.
Retirement changes the job.
The paycheck stops, but the mortgage doesn't. Neither do groceries, utilities, insurance, travel, dinners out or the things you want to do with your family.
Some of that spending may already be covered by income that isn't dependent on selling investments. Social Security is the obvious example. A pension may be another. Some households have rental income or income from an annuity.
Whatever those sources are for you, add them up. Then compare that number with what your life actually costs.
A hypothetical household, in round numbers. Your own figures go in the worksheet below.
Run your own monthThat $3,000 is where the planning gets interesting.
Now let the market fall 25%
You're retired. Your $3,000 investment withdrawal has been showing up every month just like your old paycheck did.
Then the market falls 25%.
Your life didn't suddenly get 25% cheaper.
You still need groceries. You're still paying the electric bill. The trip you've been talking about for a year is still on the calendar.
So where does the $3,000 come from this month?
Hypothetical, for the shape of the problem. A decline of any size raises the same question.
Maybe you've already answered that. You have cash set aside for near-term spending. Maybe part of the portfolio is invested differently because you know you'll need that money soon. Maybe you have another dependable source of income. Maybe your spending is flexible enough that you would temporarily take less.
There are several reasonable answers.
"I guess we sell whatever we own when we need money" is also an answer. It's just one I'd want to know before the market is down 25%.
That's what an income-floor exercise can show you.
Your floor doesn't have to cover everything
This is where I think people can take the idea too far.
The goal isn't necessarily to have Social Security, pensions or other dependable income cover 100% of your spending.
If your life costs $10,000 and $7,000 already shows up every month, having the remaining $3,000 come from a well-designed investment plan isn't automatically a problem.
Your investments are supposed to have a job in retirement. The important thing is knowing what that job is.
Your investments are supposed to have a job in retirement.
The important thing is knowing what that job is.
There's a big difference between "We need $3,000 a month from the portfolio, and here's how we've planned for that" and "We have $2 million. We'll take money out when we need it."
The account balance might be identical. The retirement experience can feel very different.
Calculate yours
You can get surprisingly far with three numbers.
Now you have something more useful than just a portfolio balance. You know the monthly job you've assigned to that portfolio.
And that gives you one more question to answer:
If the market fell 25% tomorrow, where would that money come from?
If you can answer that clearly, good.
If you can't, you just found something worth planning for.
The number can change how retirement feels
There is a psychological side to this that spreadsheets don't always capture.
You've spent decades being rewarded for watching your investment balance go up. Then retirement arrives and you're supposed to watch it come down while telling yourself everything is fine.
That's a hard switch.
Knowing that part of your monthly life is already covered can change the way you experience the portion that isn't.
Knowing that part of your monthly life is already covered can change the way you experience the portion that isn't.
If $7,000 of a $10,000 month is already coming in, a bad market doesn't suddenly put your entire lifestyle in question. You know the specific job your investments still need to do.
That doesn't make market risk disappear. It makes the problem more understandable.
And understandable problems are easier to plan around than a big account balance moving around on a screen.
What the exercise doesn't tell you
Knowing you need $3,000 a month from your investments is the beginning of the answer, not the end.
Where should it come from? How much should stay available for the next few years? Which accounts should you withdraw from? What happens to the tax bill? Does the answer change before and after Social Security starts? What if the market falls early in retirement?
Those decisions interact.
You don't need to solve all of them just to calculate your income floor.
Start with the month.
Figure out what your life costs, what already shows up, and what your investments have been asked to provide.
Then make sure you know what happens to that last number when the market doesn't cooperate.