winding down and more about spending time on favorite pursuits and new activities. It’s an exciting stage of your life, but planning for it can be confusing. There are so many factors to consider when funding retirement, it’s difficult to know where to start. But a new approach — M.U.G. — provides a simple starting point that will help make sense of retirement income planning and break the process down into easy-to-understand steps.
M.U.G. is an easy-to-remember term that’s meant to represent the various essential expenses people often need to cover in retirement, including things like a mortgage, utilities, groceries and transportation. M.U.G. could include expenses such as medical costs or whatever else you believe is a must-have in retirement.
The M.U.G. approach in retirement income planning focuses on finding ways to help cover your essential expenses with protected lifetime income throughout this next phase of your life. When you secure your essential expenses, you don’t have to worry about your retirement funds running out.
With this approach, you first identify essential monthly expenses. Then you create a plan to ensure you have enough protected lifetime income to help cover these expenses.
The M.U.G. approach is more relevant now than ever. We’re living longer in our typical retirement years today: In the United States, the life expectancy after age 65 is almost 20 years, compared with about 15 years in 1970, according to United Nations’ statistics. So we need our money to last longer and have enough income to cover our essential expenses for the rest of our lives.
Annuities work well with the M.U.G. approach because they provide protected income throughout your lifetime, typically via monthly payments. Social Security and pensions are the only other sources of protected lifetime income.
Step 1: Determine Your Essential Expenses
As mentioned above, M.U.G. represents the various essential monthly expenses you often have in retirement. For example, you might not have a mortgage in retirement (though many retirees still have one), but there could be rent, condominium fees or maintenance costs to consider. Other expenses might include:
- Health care costs such as insurance premiums and medical copays
- Other insurance premiums
- Car loans, leases and maintenance
- Travel expenses such as gas
- Credit card payments
- Any other ongoing expenses you deem essential
Using M.U.G. may change your perspective on retirement planning. Instead of simply trying to accumulate a lump sum without understanding what you’ll actually need to pay for, you’ll first focus on creating a monthly budget of essential expenses that you already know you’ll have to cover.
You’re basically using a common budgeting approach for this next stage in life. Your financial professional can help you calculate your M.U.G. by walking you through your essential expenses, helping you estimate how much these expenses will cost in retirement (including the impact of inflation) and prompting additional discussion about your plans.
Step 2: Plan for Protected Lifetime Income
Now you can develop a plan to cover those expenses. Start by combining your estimated monthly benefits from Social Security with any pension payments you expect to receive. If that amount is less than your estimated monthly M.U.G., you can bridge that protected income gap with an annuity.
When you’re able to cover your M.U.G. with protected lifetime income, you’ll feel secure knowing that your needs are taken care of. You can use other savings and investments to do everything else you wanted to do in retirement. Unlike sources of protected lifetime income, investments such as stocks, mutual funds, index funds and bonds require more active monitoring and management. Your financial professional can help assess your goals and tolerance for risk as well as determine appropriate investments for this portion of your retirement portfolio.
Cover Your M.U.G. for a Confident Future
Another benefit of this approach is the feeling of security and reduced stress from knowing you’ll be able to pay your essential expenses with protected lifetime income. In a 2019 study, The American College of Financial Services’ Michael Finke and Wade Pfau, who are also Alliance for Lifetime Income fellows, found that annuity owners are more confident and feel more freedom to spend and invest.
A 2020 study by the Alliance supports this finding. Among the survey respondents, the 42% of pre-retirees who have other sources of protected income besides Social Security, such as pensions and annuities, are significantly more confident about their ability to cover essential expenses in retirement. In contrast, only 29% of the survey participants are very confident they can cover their essential expenses throughout retirement.
Retirement planning itself can be stressful. But by covering your essential expenses using protected income sources, you can simplify the process and enjoy the security of knowing you’ve covered your M.U.G.