I read a looong article on Marketwatch today that broke down retirement into 4 boxes. We hear about a 3 tiered strategy all the time, so i didn’t think too much of the 4 box idea until I read through the piece and decided to share some of the thoughts and spare you the longevity of the article.
Farrell Dolan, a principal at Farrell Dolan Associates, prefers to think inside four boxes. The four-box strategy, as Dolan describes it, involves breaking down lifestyle expenses and retirement income sources into two sets of two boxes—and then matching up those boxes to maximize the odds that a retiree’s savings supports him or her for life.
The first 2 boxes are “essential expenses” and “discretionary expenses”, make a lot of sense in the fact that 99% of retirees all have 1 box to pull money from.
“Essential expenses,” said Dolan, “are the things I really have to have in life to make life worthwhile for us. And yes, it includes food, shelter, and clothing, and taxes, and all those mundane things.” But, he added, “Every one of us has something that goes into this essential box that goes far beyond food, shelter, and clothing.
“Discretionary expenses”, the second box, are more flexible, said Dolan. These are expenses such as travel, entertainment, and hobbies that might be important to you, but could be cut during highly volatile markets or scary times.
If expenses account for two of Dolan’s four boxes, the other two involve the two major sources of income in retirement: lifetime sources, such Social Security and defined benefit plans, and income from assets such as those found in 401(k), IRA and taxable accounts. In practice, here’s how Dolan’s plan would work: You would fill in each of the four boxes with your lifestyle expenses and sources of retirement income, and then you would connect the boxes in a disciplined, specific order, according to Dolan.
Lifetime sources of income such as Social Security and defined benefit plans should be used to fund essential expenses such as housing, food, health care, even golf for some. And, income from assets such as those found in a 401(k), IRA or taxable accounts are should be used to fund discretionary expenses such as travel, entertainment, and hobbies.
Dolan certainly make s a good case for the income boxes. If I had a choice, I would lump them into 2 boxes, and avoid all the different contracts and having my money spread around too thin. For a more in depth read, just follow the link.
You can read the rest HERE