• 4-Minute Article
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  • Nov 19, 2020

A Plan for Covering Everyday Expenses in Retirement

Retirement portfolios that cover daily expenses with guaranteed income can inspire more confidence and create greater ability to withstand the unexpected.

People saving for retirement often work toward a target account balance—such as a savings goal of $750,000, $1 million, or more. A lump-sum savings target can be an important piece of planning for retirement, but it doesn’t immediately answer the most important question: “Will I have enough income to support my retirement lifestyle?”

It can be difficult to calculate exactly how much monthly income you can generate from the balance in a retirement account. This challenge can leave people uncertain about whether they’ll have enough steady income to cover their everyday bills—and exactly where that income will come from. That lack of clarity may also make it more difficult to manage unexpected expenses or rising costs when circumstances in retirement change.

To help create a more concrete retirement plan, consider working with a financial professional on a targeted approach to retirement expenses and income needs. Ensuring that income sources match retirement expenses starts by estimating both mandatory and discretionary retirement expenses. Then, you can calculate the total amount of guaranteed income needed to cover mandatory bills.

A strong plan for retirement is one that includes enough guaranteed monthly income to at least cover anticipated expenses. Any additional savings or investments can be used to help deal with unexpected costs that may arise in retirement.


Estimating retirement expenses

The first step in this retirement planning process is to work with a financial professional to break down potential expenses in retirement, noting which are mandatory and which are discretionary. The Future Income Planner from Brighthouse Financial can help create a detailed list of these expenses.

Mandatory Retirement Expenses, Discretionary Expenses

After tallying total expenses—including discretionary expenses —the next step is to calculate total guaranteed monthly income from sources such as Social Security Income and any pensions. The goal is to identify whether there is a gap between monthly expenses and guaranteed monthly income. While many people will find that guaranteed income may not cover all these expenses, identifying this potential gap in advance of retirement may help you develop a strategy to help close it.


Filling the gap and preparing for the unexpected

A financial professional can review potential strategies for covering any gap between income and expenses. Such strategies can include using a portion of retirement savings to purchase an annuity to provide an additional source of monthly income to help cover mandatory expenses.

Annuities can offer a broad array of features and benefits, such as a fixed interest rate and predictable monthly payments or the potential for savings growth with a level of protection against losses for a portion of your portfolio. Certain annuities may also start paying income immediately or delay payment until later, depending on a person’s priorities and their time horizon until retirement.

Whatever the choice, an annuity that provides guaranteed income can not only provide more certainty about covering mandatory expenses, it can create more flexibility in how you use other investments and savings. For example, having mandatory expenses fully covered with guaranteed income may help you feel more comfortable keeping a portion of savings invested for growth to help build wealth for future expenses—whether that means achieving planned goals like travel or covering unexpected costs like a large medical bill.

What’s more, if market conditions temporarily reduce the value of those other investments, you’ll have the peace of mind that comes from knowing you have other sources of dependable income. For more on how additional sources of guaranteed income can help portfolios weather the unexpected, read “How to Protect a Retirement Income Plan,” the second article in this series.

Estimating retirement expenses and ensuring bills are covered is part of a more detailed retirement strategy than simply working toward a lump-sum savings target. That extra clarity can lead to greater confidence in a retirement plan—and an opportunity to put your assets and income sources to work toward the retirement you want.