Retirement Income Planning Made Easier With the 3-7-5 Strategy

Developing a comprehensive financial plan for the future can be a complicated task with many different parts. One of the most important, yet often overlooked, aspects of this process is incorporating a well-defined retirement income strategy.

Once we move into the retirement phase, many of us mistakenly think retirement is simply the reverse of accumulation and we pay ourselves a certain income from our savings until the money is gone. But how long will we live? How much savings is enough?

These questions are impossible to answer with any certainty, which has many people worried about their financial future. In fact, according to the recent Generations Ahead Study from Allianz Life Insurance Company of North America, nearly two-thirds (63%) of Americans say they fear running out of money in retirement more than death. Clearly, people are concerned about retirement income and are looking for help to ensure their money lasts as long as they do.

It is important to realize that living in retirement takes a whole new way of thinking and a whole new set of strategies to avoid running out of money or not enjoying the lifestyle that we want. (For related reading, see: 6 Ways to Calculate How Fast You'll Run out of Retirement Funds.)

How the 3-7-5 Retirement Income Strategy Works

One useful method that can be used to address retirement income is the 3-7-5 strategy. Here’s how it works. Start by recording three buckets of retirement expenses. These are the financial needs, wants and wishes we have. If you are uncertain what you will need in retirement, start by recording what you spend now to get a good estimate.

3 Levels of Retirement Expenses

Survival expenses (needs)

Examples: food, clothing, shelter

Desired expenses (wants)

Examples: travel, gifts, entertainment

Legacy expenses (wishes)

Examples: funds remaining for your beneficiaries or children

Once you record your retirement expenses, you then record seven possible retirement income sources that will help to cover the expenses in the three expense buckets.

7 Sources of Retirement Income

Social Security

Guaranteed income in retirement

Employer-sponsored plans

Defined benefit plans or defined contribution plans

Traditional IRAs

Contributions and rollovers

Roth IRAs

Tax-deferred accumulation, tax-free for qualified distributions

Nonqualified assets

Mutual funds, CDs, stocks, bonds, savings, life insurance

Continued employment

Phase into retirement gradually

Welfare or charity (including family members)

Last resort

Once you record your survival expenses (needs) and your desired expenses (wants), you can align those with the sources of retirement income you have identified. This will help you estimate any retirement income surpluses or gaps that may not be covered by your predicted retirement income sources. If there is an income gap, there are five options to help fill those gaps.

5 Options for Retirement Income Gaps

  • Spend less and save more now, before your retirement (for related reading, see: How to Save More for Retirement.)
  • Take on more risk to increase potential interest or return on assets
  • Lower your expectations for your standard of living in retirement
  • Work longer before you retire or take a part-time job
  • Use a combination of all four above to allow for incremental adjustments

As you can see, the 3-7-5 strategy is a simple way to start thinking about retirement income and help ensure your retirement savings last as long as you do. However, there are a few additional steps you should take as part of this process:

  1. Call your tax advisor for information on how distributions from assets may be affected by tax laws.
  2. Call your local estate planning attorney to discuss how your legacy wishes can be transferred to your beneficiaries the way you intend them to be passed.
  3. Call your financial professional to make sure your financial strategies are in alignment.

(For more from this author, see: It Pays to Prepare for Divorce or Widowhood.)


Disclaimer: This content is designed to provide general information on the subjects covered. It is not, however, intended to provide specific fiduciary, legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.