| Dreamstime.com.
Ever feel a knot of anxiety when you think about covering your essential expenses in retirement, especially with market ups and downs? There’s a powerful strategy that financial advisers use to help you build a more secure and predictable income stream: It’s called asset matching.
Think of it this way: Your financial life has two main categories of spending – the must-haves and the nice-to-haves. Asset matching is all about aligning your income sources with these different needs.
Match fixed expenses with fixed income
Your adviser may suggest that your fixed expenses should be covered by fixed income streams. These are the nonnegotiables – property taxes, insurance premiums, groceries, basic transportation, essential medications – the things you absolutely need to pay for every month, rain or shine.
Now consider your regular and dependable income streams. This might include Social Security benefits, a pension you’ve earned or predictable interest from sources like CDs or investment-grade bonds.
The goal of asset matching is to ensure that the income from these reliable sources is sufficient to cover those essential, fixed costs.
Discretionary spending and flexible sources
Then there are your discretionary expenses – things you enjoy but have more control over. Think travel, spoiling the grandkids, dining out and entertainment. These expenses should be covered by more flexible sources, such as your investments.
The beauty here is that in a good year, your investments might perform well, giving you the flexibility to splurge and enjoy those extras. However, in a less favorable year, you have the option to scale back without compromising your ability to meet your essential needs. It’s about creating a financial life where your core needs are met consistently, and your discretionary spending can adapt to market conditions.
The takeaway – peace of mind through alignment
Asset matching isn’t about chasing the highest returns on every single dollar. It’s about strategically aligning your assets to create a predictable income floor for your essential expenses while allowing your more flexible assets to fund your discretionary spending. By understanding this concept, you can create a retirement plan that not only aims for growth but also provides the security and peace of mind that comes from knowing your essential needs are met, regardless of market fluctuations.
Ben Soccodato and Chris Kampitsis lead The SKG Team at Barnum Financial Group in Elmsford.
