Most retirees share the same core concern:
“I want to know that no matter what the market does, I’ll always have enough to cover my basic expenses.” That’s exactly what the flooring approach to retirement income planning is designed to do. Instead of treating all spending the same, the flooring method separates your retirement budget into two categories:
- Essential spending - expenses you must cover
- Discretionary spending - the things that make retirement enjoyable, but aren’t mandatory every month
This simple distinction can make your retirement plan far more secure, and far less stressful.
Step 1: Define Your Essentials (Your Retirement “Floor”)
Your “floor” represents the expenses that absolutely must be covered no matter what the market does:
- Housing
- Food and groceries
- Utilities and energy
- Transportation and insurance
- Basic healthcare
Because these are non-negotiable, they’re funded with guaranteed or low-risk income sources, such as:
- Social Security
- Pensions
- Immediate income annuities
- Bond ladders or other predictable income streams
The idea is to lock in the income needed to keep your life stable and secure...no guesswork, no market-dependence, no surprises.
Example: George & Gracie
George and Gracie know exactly what it costs to cover their rent, groceries, insurance, and other essentials.
To give themselves peace of mind, they choose to purchase an immediate annuity with an inflation rider. Combined with Social Security, they now have a reliable monthly income that will continue for both their lifetimes, no matter how long they live.
With their floor in place, they can confidently use the rest of their portfolio on the things that bring joy to their retirement.
Step 2: Identify Your Wants and Wishes
Once essentials are covered, the remaining assets can be invested for growth and flexibility to pay for:
- Travel
- Dining out
- Gifts and family support
- Home upgrades
- Hobbies or lifestyle upgrades
This portion of your portfolio is managed more traditionally, diversified, market-exposed, and aligned with your desired lifestyle. Markets go up, markets go down, but your discretionary spending can adapt without threatening your basic security.
Why the Flooring Approach Works
The flooring strategy is grounded in life-cycle finance theory, a concept that basically says that money spent on essentials has the highest value. Once those are covered, everything else provides happiness, but at a diminishing rate.
In other words, securing the must-haves gives you the greatest peace of mind.
Some key benefits:
- Protection From Longevity Risk: The longer you live, the more you’re exposed to inflation, market swings, long-term care costs, and uncertainty. Only lifetime annuities can protect against outliving your money.
- Removes Market-Related Stress: Locking in your essential income eliminates worries about timing withdrawals, sequence of returns, or market downturns.
- Simplicity, especially Later in Life: As you age, managing a portfolio becomes more complex. A stable income floor makes life easier.
- Better Long-Term Outcomes: Academic research shows that retirees who “annuitize” part of their portfolio often enjoy higher lifetime income and greater spending confidence.
How We Build a Flooring-Based Retirement Plan
Here’s how we typically help clients structure this approach:
Step 1: Calculate your essential expenses - We build a clear view of the costs that must be met every month.
Step 2: Align guaranteed income with those essentials -This can include Social Security, pensions, annuities, or bond ladders.
Step 3: Protect against major risks
- Longevity → income annuities
- Long-term care → LTC coverage or hybrid policies
- Early death → life insurance
- Market volatility → limiting essential expenses to guaranteed income
Step 4: Invest the remainder for growth - Your discretionary spending bucket is optimized to fight inflation and support your lifestyle goals.
Step 5: Adjust over time - As your spending needs shift in your 60s, 70s, 80s, and beyond, your plan evolves.
A Retirement Plan You Can Actually Live With
The flooring approach gives you something incredibly valuable: certainty.
When you know that your essentials are covered every month, no matter what happens, you’re free to enjoy the rest of your retirement with less stress and more confidence.
If you’d like help building a plan where your income is dependable, flexible, and aligned with your lifestyle goals, I’d be glad to walk you through it.