#262 - How to Live Without a Paycheck: The Upside of Building an Income Floor

How can building an income floor ease your worries about retirement and life without a paycheck? If you are worried that having a 2-year cash reserve won’t give you enough security then you may want to build an income floor to help ease your concern. Over the past few episodes, we have been discussing how to live life without a paycheck and you have learned how to build a bucket system. But some of you may feel that this isn’t quite enough to help you weather the times of market uncertainty. Listen to this episode to hear how building an income floor can give you more peace of mind.

“Listen to episode 262 of #RetirementAnswerMan and learn how to live without a paycheck. Discover the upside of building an income floor.”

8 ways you may be making retirement too complicated

Do you like to make easy things difficult? We often make retirement more difficult than it needs to be. Here are 8 ways people often complicate retirement.

You make decisions in isolation. We often don’t think of the broader perspective of our financial lives when making a financial decision. We focus on tactics rather than the big picture. It’s important to have a process that follows a system that creates a strategy that leads to tactics rather than the other way around.
You have too many accounts. People collect things over time and that includes 401K’s, and IRA’s and various other retirement accounts. Make life easier by consolidating your accounts.
You may have too many investments even in one account. Having too many investments makes managing the risk/return allocation too difficult. Think, does this extra investment add value? Does it serve a purpose in the overall scheme of things?
You may have too many advisors.
You chase the markets. Are you chasing investments as the market fluctuates? It creates a lot of unnecessary activity. It may feel like you are more in control, but it actually makes things more complicated.
You change your process too much. The key to having a solid process is to only have one. You can’t hop around. Stick with one process. It can evolve but don’t change gears completely.
You think more information will give you more clarity. But more information can actually be very distracting.
Overplanning and analyzing do not give you more clarity.

How do you refill your bucket in bad years?

After listening to this month-long series on how to live life without a paycheck you know how to fill your bucket with 2 years of cash reserves. But is 2 years really enough? What do you do in the bad years? What happens if the markets take a turn for the worse? Here are 3 ways that you can adjust your approach.

You could batten down the hatches. Slow down in your wants and wishes categories to reduce discretionary spending. Fund your base lifestyle only.
Ramp up pretirement. Focus on your human capital until the markets bounce back.
Readjust your long term goals. Agile retirement planning is all about making adjustments along the way.

“Learn how to create your #BucketSystem and keep your rhythm on this episode of #RetirementAnswerMan.”

What is an income floor?

What if you want more clarity? If you still feel that 2 years of cash reserves won’t be enough to give you the peace of mind you need then you can create an income floor for the following 3 years. An income floor overlays on top of your cash reserves. The income floor is built by bonds that mature like a ladder or it can be created by ETF’s or other funds. An income floor can give you more room for success by reducing your risk of overspending and reducing your behavioral risk.

How do you determine whether you should add this income floor on top of regular cash reserves?

Do you feel like you need an income floor? You can think about the level of your base needs that are funded by social capital. Social capital is guaranteed income sources like social security and pensions, income sources that don’t depend on the markets. The higher amount you have here the more confident you may be with only 2 years of cash reserves. You can also consider what level of human capital do you have like income from consulting or royalties. It is also important to consider how well funded you are. If you are underfunded then you will definitely need human capital. Learn how to create your system and keep your rhythm on this episode of Retirement Answer Man.

“Listen to this #RetirementAnswerMan series on how to live life without a paycheck. Learn how to fill your bucket with 2 years of cash reserves and find out what to do if you need more.”

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

HOT TOPIC SEGMENT

[2:55] Do you like to make easy things difficult?

PRACTICAL PLANNING SEGMENT

[14:52] Is 2 years enough cash?
[19:10] How do you refill your bucket in bad years?
[20:44] What is an income floor?
[23:24] How do you determine whether you should add this income floor on top of regular cash reserves?