Building a Retirement "Income Floor"

Building a retirement plan can often feel like trying to solve a puzzle where the pieces keep changing shape. Between market volatility, inflation, and the fear of outliving your money, the "traditional" approach of simply withdrawing 4% from a portfolio can feel a bit nerve-wracking. It often leads retirees to become ultra-conservative, afraid to spend the money they worked so hard to save.

At Flourishing Path Financial, I believe your retirement should be defined by peace of mind, not by whether the S&P 500 had a bad Tuesday. One of the most effective ways to achieve this is through the "Income Floor" Strategy.

What is an Income Floor?

The "Income Floor" strategy is a "safety-first" approach to retirement. Instead of relying on a single bucket of investments to pay for everything, we create a retirement budget that divides your expenses into two categories: Needs and Wants.

We then build a "floor" of guaranteed income that covers 100% of your needs. This ensures that no matter what happens in the stock market, your lights stay on, your taxes are paid, and there is food on the table.

Step 1: Defining Your "Needs" (Non-Discretionary Expenses)

Your "needs" are the non-negotiables — the expenses that would be painful or impossible to cut if the economy or the market took a downturn. These typically include:

• Housing:  Mortgage/rent, property taxes, and homeowners insurance.

• Maintenance:  A reserve for home repairs and auto maintenance.

• Healthcare:  Insurance premiums, Medicare parts B & D, and out-of-pocket medical/dental costs.

• Transportation:  Fuel, insurance, and auto registration fees.

• Groceries:  The "at-home" food budget.

• Utilities:  Electricity, water, trash, and heating.

• Basic Clothing:  Necessary apparel and footwear.

• Taxes: income taxes.

Step 2: Defining Your "Wants" (Discretionary Expenses)

Once the non-discretionary needs are covered, you can begin to think about everything else. These are the things that make retirement fun and give meaning to life, but could be scaled back temporarily if the market has a particularly bad year:

• Entertainment:  Eating out, concerts, movies, plays, and sporting events.

• Travel:  Vacations, weekend getaways, and travel to see kids/grandkids/friends.

• Leisure:  Hobbies, club memberships, and gym fees.

• Subscriptions:  Streaming services (Netflix, Spotify), cable TV, and magazines.

• Gifting:  Charitable donations or gifts to children and grandchildren.

Step 3: Building the Floor with Guaranteed Income

The goal is to match your non-discretionary expenses with income sources that are "set it and forget it." Focus on reliable income sources that aren't tied to daily market fluctuations:

1. Social Security:  The foundation of almost every income floor. See my blog posts on "When Is the Best Time to Claim Social Security?" and "How to Create an Income Bridge to Delay SS" for additional insights on ways to maximize Social Security income streams.

2. Pensions:  If you are fortunate enough to have a defined-benefit plan.

3. Annuities:  Immediate or deferred annuities can be purchased from a high-quality insurance company to "manufacture" a pension-like stream of income for life. I would recommend purchasing an annuity that has cost of living adjustments built in. Otherwise your purchasing power will be cut in half by inflation over a 25-30 year retirement.

4. Ladders:  Buying a set of CDs, TIPS (Treasury Inflation-Protected Securities), or Bonds scheduled to mature each year over the next 25-30 years ensures a specific amount of cash is available exactly when you need it.

5. Variable Income (with a "Haircut"):  Income from rental properties or high-quality dividend stocks can be included, but it might be wise to discount these by 10-30% to account for potential vacancies or dividend cuts.

Example

You can create an income floor from a combination of the above income sources. For example, suppose your retirement budget calls for non-discretionary expenses of $50K/year and discretionary expenses of $25K/year (increasing with inflation). If you expect to have $30K/year in Social Security income, that leaves $20K of non-discretionary expenses to be funded each year. If you have a pension for $25K/year then you are done. Your non-discretionary expenses are all covered and your entire portfolio can be used to fund your discretionary expenses.

If, like most people, you do not have a pension you can use part of your portfolio to purchase an immediate annuity with a cost of living adjustment feature that provides $20K/year. For example, in early 2026 a 65 year old male might purchase a $20K/year joint-life immediate annuity with a 3% cost of living adjustment and a 100% continuation of benefits for his spouse for about $425K. If the couple has a $1 million portfolio, they could purchase the annuity to complete their "income floor" and then use the remaining $575K to fund discretionary expenses. They could sustainably withdraw somewhere between $23-28K/year (adjusted for inflation) for their discretionary expenses. Assuming that they are likely to spend much less in their 80s and 90s, they could spend even more on discretionary expenses in the first decade of their retirement and then taper off their spending over time.

Alternatively, the person/couple could use part of their portfolio to buy a 30-year TIPS ladder with $20K (in today's dollars) in bonds maturing every year. While the person/couple could use bank CDs or regular bonds in a ladder, I prefer TIPS because you can plan on getting the same purchasing power each year in the future.

Why This Strategy Works

The Psychological Edge:  When your non-discretionary "must have" expenses are covered by guaranteed sources, you are able to sleep well at night and are less likely to panic-sell your stocks during a market crash. You know your survival is not at stake, which allows you to be a more disciplined investor with the rest of your portfolio.

Spending with Permission:  Many retirees struggle to spend money because they fear "running out." When you know your essentials are covered for life, you have "permission" to spend your investment portfolio on the fun stuff—the travel and the hobbies—knowing that your lifestyle is secure.

Find Your Personalized Flourishing Path

While the principles remain the same, the specific "income floor" looks somewhat different for each person or couple. It depends on your age, your expected longevity, your risk tolerance, your resources, the balance between your discretionary expenses and non-discretionary expenses, and what you want your legacy to look like.

If you want additional resources, visit www.flourishingpath.com/resources to find tools for optimizing your Social Security, building TIPS ladders, and getting quotes on immediate annuities.

Are you ready to stop worrying about the "what ifs" and start building an "income floor" you can depend on? Reach out to me at www.flourishingpathfinancial.com/book-online to schedule a free Discovery Session and let’s design a retirement income strategy that lets you live life to the fullest.

Author: John Macy, MBA, RICP®

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