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Why Income Allocation Works

As we go throughout our careers, the goal is to always have a steady paycheck, to have our income streams increase, and work towards a successful retirement. But what happens when we reach retirement and that steady income stream is no longer there? This is where income allocation becomes necessary. Doing this properly can lead to that final goal of a successful and long-term retirement. 

The world we live in financially can be broken down into five easy steps.


Step 1 – Earn a Paycheck

It is hard to do just about anything in our world without earning a paycheck. But it is what you do after you get that paycheck that makes a difference.

Step 2 – Taxes

Whether you want to or not, we all must pay our taxes. Regardless of if you are a small business owner, freelancer, or manager at a corporate office in Raleigh, taxes are a part of life. And if you are a homeowner, you have property and school taxes to pay as well.

Step 3 – Pay your Bills

After you pay your taxes, you have your everyday bills. You may wonder why taxes come first but remember, not prioritizing your taxes can cause a very high penalty that will limit you when it comes to Steps 4 and 5. Everyday bills can be as simple as your mortgage or rent payment to your gym bill or your Netflix account payment. You also must remember to add in your grocery bills.

Step 4 – Fun!

One of the many benefits of working so hard throughout your life, is to be able to afford the things you want to. This could mean a vacation out in the Outer Banks, running a race in Charlotte, a birthday party, the list can go on and on.

Step 5 - Investments

Whatever is leftover at the end of the day is what you should be putting towards your retirement. This could be in the form of a 401k, a savings account, an HSA, real estate, or the stock market.

But what happens after you retire? When Step 1 goes away? The reality is, Step 5 must be able to fund Steps 2-4 in retirement. This is where income allocation is key and can help set you up for a fruitful retirement. The key is using your investments to recreate what was once your paycheck. But we know it is not as simple as that which is why you will need guidence from a local financial advisor to help you do the math.

The Process

  1. Define your Budget
    1. What do you want to spend vs. what do you need to spend?
  2. Define your Income Sources
    1. Do you have investment properties?
    2. Do you have a pension or 401k?
    3. What do your stock investments look like and how risky are they?
    4. What other income streams have you created for yourself?
  3. Define your Income Gap
    1. What is the difference between your budget and your income streams? This is probably the most critical step to define as it can make or break your long-term retirement plans.
  4. Develop the Best Strategy to Close the Gap
    1. This is the piece that we help our clients with the most. How do you use what savings you have left to close the gap between your budget and your income sources?

If you are preparing for retirement and need help developing an income allocation plan, let us find you the right advisor for your situation. Simply, click "Find Match" go throught the questions and get matched instanly with a financial advisor in North Carolina.

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Everyone wants to enjoy life in retirement and an income allocation plan is the best way to make that happen. But the reality is many people face the challenge of not having enough in the bank to live comfortably from. (read more)