The Flooring Approach

The Retirement Flooring Method focuses on covering your monthly expenses with a guaranteed lifetime income. This method of managing your budget allows you to have the confidence that no matter what the market does your bills will get paid.

There are two ways to using the Flooring Method approach. Some folks will look to use it to make sure their fixed expenses are covered in retirement whereas others will use it to cover both their fixed and most of their variable expenses.

First, you want to determine what expenses you need and want to cover. They can be fixed expenses such as your utility bills, housing, car payments, health insurance, gas, groceries, pet grooming, HOA fees, etc. When adding up these numbers remember to add a bit of a cushion to allow for cost-of-living increases. The second way is to include your variable expenses such as entertainment and travel.

Once you determine what expenses you want covered, without worry, determine how to maximize your lifetime income to cover those expenses.

What provides a Guaranteed Lifetime Income?

There are three different ways to get a guaranteed lifetime income.

The first is Social Security. Once you turn on your social security, this can certainly provide you with a guaranteed lifetime income stream which very well might cover most or all your fixed and variable expenses. Keep in mind, if you are retiring early, say age 55, then this option won’t be available until 62.

Planning Tip: If you are married and planning on using social security as your Flooring Method, keep in mind that when one spouse passes one of the social security checks will go away.

The second guaranteed lifetime income is a Pension. Now these are not as prevalent as they were 30 years ago but they’re still around for many.

When it’s time to activate your pension, you’ll be given a choice of whether you want single life or joint life. Single life income will pay the most but will go away on your passing. If you are married and want to maintain a source of income for your spouse in the case of your death, joint life is an option. Most pension plans will give you multiple options under the joint life option. Choose wisely. Everyone wants the highest check possible but be sure not to short-change your spouse based on what looks best today.

Planning Tip: Much like with social security, when spouse who has the pension passes away, understand how will affect the surviving spouse’s income.

The last guaranteed lifetime income option is an Annuity.

With an Immediate Annuity you deposit a lump sum of money and it will start paying you out a lifetime income based on your life expectancy. A joint life option is also available but does change the amount of income.

The second is what’s called a Fixed Index Annuity. With this annuity, your principal is protected against a stock market drop but you still participate in the upside of the market. There are different options to deposit money into this type of annuity. It could be a lump sum deposit, or multiple deposits. Fixed Index Annuities also offer the option for deferred growth, you don’t need to start taking income right away. Often times there are advantages to waiting some time to turn on the income. Annuity companies have different options as far as deposits and income. We are here to help you determine what works best for your plan.

There are two ways to create income with a Fixed Index Annuity.

The first way is to buy one with a lifetime income rider which assures that you’ll never run out of money. Many of these will give you a “roll up” which means your income account will grow by a specific percentage every year regardless of what the stock market does until you turn on the income. When you’re ready to start the income, you can choose to cover a single life or joint life. Insurance companies will charge a rider fee on these which is normally between .50% to 1.5% depending on the company.

It is possible to take income from a Fixed Index Annuity without purchasing an income rider. This way of taking income is not a guaranteed lifetime income source but is often used, especially with variable expenses. The second way to set up a Fixed Index Annuity to pay you out income, is to take a free withdrawal each year. Most companies will allow you to take out 10% of your account value each year without a fee or surrender charge. (Some ask you to wait one year before you do so.) For example, if you take out a 4% withdrawal each year, you wouldn’t be paying an income rider fee and owning the annuity would cost you zero in fees. Now with this way, the income wouldn’t be a lifetime “guaranteed” income but if the annuity does its job and it does better than 4% a year, you are still maintaining/growing your value. That’s right, Index annuities that don’t have riders on them, have zero fees. Every annuity is supposed to be expensive right? Not this one. Now the downside is most of these have a 10-year surrender period. However, if you are using this to cover your fixed and variable expenses, then the hope is you are going to live longer than ten years and still be needing this income 20+ years from now.

Planning Tip: In an ideal world, you use your social security and, if available, a pension for your Flooring Method. If your pension nor your social security cover all your expenses, that’s when you can create your own pension using an annuity to fill in the gap.

Why use the Retirement Flooring Method?

Worrying about money is stressful and worrying about it in retirement is even more stressful. The Retirement Flooring Method takes the worry out of your retirement plan because when you know your expenses are covered, you can rest easy. Once covered, this allows you to leave the rest of your money in the stock market which helps you outpace inflation.

Planning Tip: Know your risk tolerance.  Each investment carries with it a level of risk. An annuity is considered a conservative investment because it is backed by the claims paying ability of the insurance company.  Bonds, money markets and CD’s are also considered conservative. Investments in the stock market or products containing stocks are consider riskier. Depending on what the investment is determines the level of risk. Matching your risk tolerance to the amount of risk in your portfolio is crucial to a stress-free retirement. We can help you determine the level of risk you’re comfortable with.

An annuity is a great way to secure lifetime income to cover any shortfall you may have after social security or a pension.

Is the Retirement Flooring Method right for you?

Only you can answer that question. Many of you who are already retired are doing this method without even knowing it.

Because there are some twists and turns to make sure you have it right, if you’d like to discuss this method further, please feel free to reach out to us.