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Are you a Constrained Investor? (and why it matters to your retirement) Thumbnail

Are you a Constrained Investor? (and why it matters to your retirement)

I know you’re probably wondering what a constrained investor is and what it has to do with retirement. We’ll learn what it is shortly, but more importantly, being a constrained investor impacts retirement planning. Surprisingly, it greatly impacts financial security for retirees planning to use savings as the primary way to pay for retirement. Read on to better understand why it’s important, how it impacts retirement, who it impacts, and moves to make if you’re impacted.

What is a constrained investor?

Broadly speaking, anyone who reaches retirement with savings and will rely on those savings as the primary source of retirement spending is a constrained investor. The amount may be modest or vast. It’s not about how much money is available. Rather, it’s about the relationship between savings and how much income is needed in retirement. If you are underfunded (reach retirement with fewer savings than needed) or you’re overfunded (retire with more savings than needed), you’re not a constrained investor. In other words, a constrained investor is someone with greater income needs relative to the amount of savings.

Are you a Constrained Investor?

There’s a simple formula to determine this. It’s called the Income-To-Assets-Ratio, where the required annual income is divided by the amount of savings available to produce income. If the Income-To-Assets-Ratio is greater than 3%, you’re a constrained investor, and you’ll need to approach retirement income planning differently than someone who isn’t. We’ll go through the steps necessary to help you calculate your Income-To-Assets-Ratio.

  1. Determine your required annual retirement income need. This is the amount of annual spending you MUST have over the course of retirement. Start by adding up your monthly essential expenses. These include housing, transportation, food, medical, and utility costs. Next, add up your monthly discretionary expenses. These can include the things that make life fun but are unnecessary, like travel, dining out and charity. From there, add a buffer amount for unplanned expenses, say 30% (or whatever amount you feel comfortable with), to the essential and discretionary total amounts to arrive at the monthly required income. Multiply this amount by 12 to arrive at your required annual income. 
  2. Total up all your retirement savings. (401(k)s, IRAs, Cash-Value life insurance, home equity, anything besides Social Security or pensions you intend to use to pay for retirement). 
  3. Do the math: Divide step 1 by step 2.  
  4. Constrained Investor determination. You're a constrained investor if the Income-To-Assets-Ratio is greater than 3%.

How does it impact retirement?

I’ve talked about how spending in retirement is more consequential than saving for retirement and the importance of having an income distribution strategy for converting savings into income to pay for retirement. Most retirees face challenges in retirement, but here are a few common to a constrained investor:

  • Their reliance upon savings is unconditional due to limited assets relative to anticipated income needs.
  • Their money is under pressure to produce income to fund a minimally acceptable lifestyle (the amount of money needed to meet essential and limited discretionary expenses plus a small cushion for unexpected expenses).
  • They have no margin of error for investing mistakes.
  • They must be consistent and disciplined throughout retirement about how they invest, spend and manage risks.
  • They need an investment strategy to manage emotions during periods of market volatility.
  • They need a strategy to protect against Inflation Risk, Timing Risk, and Longevity Risk.

Unless a constrained investor has a strategy for managing all of these challenges, the standard of living in retirement is can be seriously compromised. 

Things to keep in mind if you’re a Constrained Investor

What should you do if you’ve determined you’re a constrained investor? The top priority for a constrained investor begins with having a retirement income plan that addresses the aforementioned challenges. This starts with choosing an income distribution strategy that generates lifelong annual required income while protecting against the key retirement risks of inflation, timing, and longevity. There are various income distribution strategies. But one, in particular, the Hybrid-Time Segmentation strategy, has proven to be quite effective. It reliably sources income and mitigates risks by matching short-term spending needs with secure income sources and more distant spending needs with less secure income sources to generate income. It’s the best approach among the various income distribution strategies for constrained investors.


One of the most valuable things you can do for retirement is to determine whether you are a constrained investor. Doing so will inform you of the importance of selecting an income distribution strategy that reliably sources retirement income and protects that income from inflation, market volatility (especially early retirement), and long life. Read more about the Hybrid-Time-Segmentation income distribution strategy to learn how it works, and if you want to see how it can benefit your retirement, schedule a complimentary 20-minute phone chat.