Blog Series: Retirement Income Architecture

April 3rd 2017, by Garrison R. North

In the third blog of our Income Architecture Blog Series, we are discussing a calculation we recently integrated into our planning process called the Income-to-Asset Ratio. One question that many clients have when they are planning for retirement income is, “Can my investments support my income need throughout retirement?” Our Income-to-Asset Ratio can assist in answering that question and can help us build a framework for your Retirement Income Plan.

The Income-to-Asset Ratio is a fairly straightforward calculation. After we have calculated your total capital need for your retirement income plan, we divide that number by your total investable assets. This gives us the percentage of assets that need to be dedicated to your retirement income plan. For example, if your retirement income capital need is $750,000 and your total investable assets are $1,000,000, your Income-to-Asset ratio is 75%.

Our Income-to-Asset Ratio gives us perspective on how feasible the rest of your financial goals are. A lower ratio tells us that there will be resources left over after addressing retirement income to allocate to other goals. A higher ratio decreases the number of goals that can be addressed in retirement. We have guidelines that we share with clients regarding how many of their other goals can be addressed based on their ratio.

This ratio also allows us to plan for each individual client. It shows us that feasibility of a retirement income plan is not linked directly to assets or income need, but the ratio of the two. Two clients with the exact same assets or the exact same income can have very different ratios depending on what the other side of the ledger says. This helps us frame a conversation around what goals we can pursue for a client and if expectations are in line with specific resources.

Our income-to-asset ratio is a simple calculation that serves a significant purpose in putting together a retirement income plan. The framework it provides is an essential part of building an intentional, specific and measurable retirement income plan.