Matching Retirement Income to Expenses

Have you read about the “4-box strategy” for matching your retirement income to your retirement expenses? You should because it makes sense for the careful planner worried about retirement income survival.

The strategy is not complicated and is conceptually similar to my “Failsafe Retirement” plan.

The first step is to identify and separate your retirement income streams into two categories: (1) reliable sources of lifetime income and (2) income from assets. This gives you the first two “boxes” in the 4-box strategy.

Category (1) income sources would include Social Security and pension benefits. Category (2) income sources would include using your retirement investments to generate income, e.g., interest, dividends, and periodic sales of stocks, bonds, and mutual funds.

The second step is to identify and separate your retirement spending into two categories: (1) essential expenses and (2) discretionary expenses. This provides boxes 3 and 4 of the 4-box strategy.

Category (1) expenses would include at least food, shelter, transportation, and health care. Category (2) expenses would include everything else, e.g., travel, entertainment, hobbies, etc.

The third step is to align the income from box 1 (lifetime income sources) with the spending from box 3 (essential expenses.)

The fourth step is to align your expectations for discretionary spending (box 4) with your reasonable expectations for box 2 income from your assets.

So what happens if box 1 (lifetime income) is not large enough to cover box 3 (essential expenses)? One possible solution is to reduce your shelter costs by downsizing and/or relocating to a lower cost area.  Another possible solution is to use some of your retirement assets to purchase an immediate annuity to cover the gap between guaranteed income and essential expenses.

If you are fortunate, box 1 is larger than box 3. In that case, you can comfortably move some of your discretionary expenses (e.g., your favorite hobby or travel) from box 4 into box 3.

There are two significant benefits to using the 4-box strategy to implement a  financial plan for retirement.

First, it causes you to assess how you will meet your basic spending needs in retirement. When and if you are able to do that, you will be less anxious about running out of money or having to depend on family to support you.

Second, it causes you to also look hard at your discretionary expenses and whether they can be sustained when you retire. After you match the size of box 3 with box 1, there may be a significant disparity between the sizes of boxes 2 and 4. In that case, you will have to either shrink box 4 (spend less on non-essentials) or enlarge box 2 (e.g., work longer and save more.)

Of course, inflation must be factored into this analysis.

Read more here about the 4-box retirement income strategy.




  1. Doris says

    I guess I am one of the fortunate ones as my retirement pension and SS take care of daily living expenses. I have never thought of relying on the equity of my primary residence as funds for our retirement—I don’t have any intention of downsizing to a smaller home and we still have a small mortgage on the home as well. What we do have to bolster our income in retirement is an investment property, currently rented and has been for the last ten years. This is our “third” SS check, I as refer to it. It has been a blessing (and yes, a curse) but it supplies us with additional source of income and we have not yet had to touch any funds in my TSP plan nor my husband’s IRA. Hopefully, we can continue to defer any withdrawals from either plan until we are 70 1/2 which is six years down the road. I am sure at some point in time, hubby will get tired of maintaining the rental property and want to sell. If that is the case, there is a decent amount of equity in it on which can be added to the retirement monies. All in all, I feel we are in a good place.

  2. Brenda says

    Doris, I guess you and I are similar. I grew up poor, so started putting money away from 17 on up. I was able to retire (govt.) at 30 years at 48 (law enforcement), and since I saw retirement coming, paid off the last of my mortgage, have always been frugal, and like you, have yet to touch my TSP. I have a very comfortable amount in there, and it is still growing at over 30%, so no complaints!

    No world travel (lol!!), as the government sending me all over the world kind of got me sick of travel. I now only travel in my RV with the hubby and our fur kids!!! Like you, life is good. :)

    • Doris says

      Brenda—you were way smarter than I as far as saving at such and early age. I commend you for the discipline. Now, I did not start my federal career until age 35 and I had to do a lot of catching up. I can’t explain my good fortune ,call it providence, dumb luck etc. but I did not suffer the huge losses when the market went south in the 2000 and 2008 implosions. If I had lost significant amounts of money during these periods, I would not have been able to retire when I did. Also, I am not a person who spends huge amounts on vacations, cars or frills—-my mother, rest her soul, was frugal in many ways but also enjoyed herself and traveled extensively in her retirement years. My philosophy is to live life comfortably but not extravagantly. I guess you could say that I am a person that is contented with what I have, not what I want to purchase or desire. Discipline and time are the most critical things to focus on when you are saving for the golden years.

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