How To Use The 4-Box Strategy For Retirement Income

By Mark P. Cussen, CFP®, CMFC, AFC | November 20, 2012 AAA

The segment of the U.S. population that was born into Generation X has endured a number of major financial setbacks during the past few years. The Subprime Meltdown of 2008 has resulted in increased market volatility, a substantial drop in home values and a near zero-interest rate environment. Those who are in this category cannot afford to just sit back and wait for the markets to turn themselves around; they must take control of their finances now and start making some realistic projections of their retirement income. One method of doing this has been developed by Farrell Dolan, a financial planner with a company that bears his name.

The Four-Box Method
Dolan has created a method of classifying retirement income and expenses into two pairs of boxes. One pair of boxes pertains to the retiree's income, while the other pair deals with living expenses. The boxes can be broken down as follows:

Fixed Expenses
This box contains the necessary living expenses that retirees will face, such as rent or mortgage payments, car expenses, healthcare costs, and utilities. Although this box deals primarily with necessities, it can also include certain expenses that the retiree knows will be paid, such as golf club dues or a vacation.

Variable Expenses
This box covers the less important expenses that the retiree can get along without if necessary, such as dining and entertainment, hobbies, and other luxuries.


Fixed Income
All of the retiree's guaranteed and fixed income payments go in this box. This includes Social Security income, pensions, annuity payments and other fixed sources of income that will not change due to market conditions.

Variable Income
This box contains all of the non-guaranteed income due to the retiree, including distributions from an IRA, 401(k) or other defined contribution plan; investment income; and irregular income like inheritances.


Of course, some types of income or expenses can be either fixed or variable depending upon their nature. A utility payment may be fixed if it is paid on a level billing plan or variable if it is not. Earned income may likewise be either fixed or variable depending upon the degree of regularity in which it is paid. The basic idea behind the four-box system is to simply match the fixed income box up against the fixed expense box and the variable income box with the variable expenditures box. Of course, the most important element in this plan is that there is enough fixed income to pay the fixed expenses.

If this is not the case, then the retiree must determine the amount of the shortfall and what will need to be done to bridge the gap. If enough liquid assets are available, then one or more guaranteed investments, such as a bond ladder or indexed annuity, may be the solution. If an annuity is used, the retiree will have to determine which type of annuity contract best fits his or her needs. If money is needed now, then an immediate annuity should be used, and a deferred contract can allow the assets to grow for a while if the payout can be delayed. If monthly payments need to be a high as possible, then a straight life payout may be appropriate. People who can afford it are probably better off opting for payouts that will guarantee minimum returns on their money if they die soon after payments begin. If funds are not available for this alternative, then a part-time job or other form of earned income may be necessary for a while. In some cases, retirement may have to be postponed.

The Bottom Line
The four-box strategy is ultimately designed to give retirees a clear picture of how their fixed and variable incomes stack up against their fixed and variable expenses. For more information on retirement planning, consult your company retirement plan specialist or your financial advisor.

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