Which Method Will You Use??

27 May 2015

In Retirement Income Planning, there are two traditional methods to calculate your retirement income, the Income Replacement Ratio and the Expense Coverage Calculation. While both are popular, one seems to be gaining more momentum among financial advisors.

The old method for planning used a percentage of the income you earned prior to retirement to calculate retirement income.  For example, if you and your spouse earned $100,000 annually, and you want to plan for 85% replacement which would be $85,000 in income using this method.

Although this is a good start, it can often be unreliable. First, a person’s expenses can vary drastically after retirement and even the few years prior. For example, we often see clients with their homes and vehicles paid off. Next, it’s possible that retirees can earn more in retirement than they did before. Although that is a great problem, you don’t want to be drawing out any more than you have to, as this can slow the overall growth of your portfolio and create tax issues as well.

In comparison, the method of planning on what you actually need, commonly referred to as the Expense Coverage Calculation, is gaining popularity. This method is more complex than just having your fixed and variable expenses calculated and drawing enough income to cover those expenses. It will allow you to draw out only the money you will need and no more. This allows you to leave the assets alone to grow and defer the taxation as well. By doing this, you may be able to defer Social Security benefits, which can be as much as 8% per year in waiting.

If you subscribe to the Premier Bucket System, a system we use at Premier Investments, this strategy can be easily implemented. Whichever method you use, the goal should be to take out the minimum from your portfolio to allow growth and defer payment to Uncle Sam.

Good luck!


Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Premier Investments of Iowa are not affiliated. Cambridge does not offer tax advice.


Jeffrey Johnston

Jeffrey is originally from Solon, Iowa. He currently resides in Swisher, Iowa with his wife, Prudence, and his three children, Seth, Ian, and Roman. He graduated from the University of Northern Iowa in 1989, where he majored in Finance and Investments. He has 24 years of experience in the investment and estate planning business. He is currently the President of “Premier Investments of Iowa, Inc.” Jeffrey’s main focus is Estate and Investment Planning for Senior Citizens and Pre Retirees. Jeffrey became a Chartered Financial Consultant (ChFC) in 2001. He is the author of many articles on industry related topics and he is a frequent seminar presenter. He is a Board Member TRIAD Linn County Seniors Against Crime, and he is also a past Board Member of the Heritage Area Agency on Aging Task Force. He is a member of CEO Roundtable in Cedar Rapids, a Daybreak Rotary Member, and a member of the Cedar Rapids Estate Planning Council. In March of 2009, Jeffrey became the host of the Premier Investments of Iowa Financial Hour which airs every Tuesday Evening from 6PM -7PM, on WMT 600 AM Radio. In his free time he enjoys golf, fishing, scuba diving, traveling, and coaching son’s basketball teams.