Mind the Gap between Income and Expenses

A comprehensive financial plan helps define the “gap” between how much money you'll need in retirement and when you'll need it.
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By Jim Werner, CFP®

Growing up, I had a paper route on Voorhis Avenue in Rockville Centre, NY. A Monday to Saturday subscription cost $2, and weekly subscription was $3. That was 30 years ago.

My local deli sells five newspapers: Newsday, NY Post, Daily News, NY Times, and the Wall Street Journal. The price list for the papers is taped to the wall behind the cash register. Every time a paper changes price, the old price is scribbled out, and the new price is listed. When the new price is written over the old price, it is a higher price. The list is like a backward looking time capsule of how papers increase in price over time.

That same paper I delivered growing up now costs $17.50 for the week.

managing income and expenses

I use this as a realistic example to help people plan and prepare for their future expenses. When I meet with people, I’ll show them the picture I took of the deli’s price list, and ask them to predict the price of a newspaper in 10 years and 20 years. Some people predict a two or three fold price increase, while others sarcastically joke about the extinction of newspapers in 10 or 20 years.

Regardless, the example helps people plan for their future income and expenses. With lifestyle expenses being the same, a retiree should plan for expenses doubling every 15 – 20 years. Some people may see a decrease in expenses as debts are paid off, they downsize a home, or dependent children move away. Others may realize an increase in expenses as lifestyle costs increase, or perhaps there is a need to support a loved one.

From a planning perspective, it’s important to know your current expenses, as this serves as a baseline to help estimate your future income needs. Reliable income sources such as social security benefits, annuity income, and fixed income payments are matched up with expenses. In a likely scenario where expenses will increase at a faster rate than income, a retiree will become dependent on other assets to provide themselves with raises for their retirement income needs.

The comprehensive financial plan helps define the “gap”, which is the difference between income and expenses. The gap helps define how much money you will need and when you will need it.

The successful retiree can help supplement the gap through earned income, rental income, or income from investment assets.

Assets that are earmarked for expenses over the next two years should be kept in a short-term account. The short term account can help protect the principal and provide liquidity as needed.

Assets designated for income in three to seven years can be invested in balanced funds and bonds. A well-diversified portfolio of high quality stocks should be considered as an appropriate investment for income needs in eight or more years. This allocation strategy helps fulfill the retiree’s short term income needs, as you never want to expose short term money to unnecessary risks or volatility. Conversely, having excess funds short term accounts will erode purchasing power and severely restrict the opportunity for investment growth.

Asset and income planning is important, but expense planning comes first. After all, newspapers aren’t coming down in price.

About the author: Jim Werner, CFP®

Jim Werner, CFP®, is a vice president with Halliday Financial. Halliday Financial is full service, comprehensive financial planning and investment advisory firm in Glen Head, NY. Jim and his team specialize in helping union members, educators, and administrators make smart decisions with their finances.

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