Editor's Note: This story originally appeared on Boldin.
When most people think about retirement planning, they think about savings goals, investment returns, or net worth. But according to Nobel laureate Robert C. Merton, that’s the wrong place to start.
The most important question in retirement isn’t “How much have you saved?” It’s “How much income will you need — and how will you generate it?”
Merton told Boldin: “Overwhelmingly, I’m trying to make the case that the thing that matters for retirement is the amount of income you get and not how big your pot is. Those are very different.”
Retirement planning isn’t just about how much you have; it’s about how long it will last. And that means focusing on income planning that aligns with your actual spending needs.
Income as the Foundation of Your Retirement Plan
Merton argues that retirement income is the most critical financial planning metric. While net worth and return on investment matter, they don’t directly answer the most pressing retirement question:
Can you afford to live the life you want, for the rest of your life?
People naturally think in terms of income. When asked how much money it takes to live a certain lifestyle, they rarely quote a net worth figure. They talk about income:
- “You’d need about $70,000 a year to live like this.”
- “My pension covers two-thirds of my salary.”
- “Social Security will pay me $2,300 a month.”
Even government programs follow this logic. Social Security doesn’t give you a lump sum — it gives you guaranteed monthly income for life. That framing makes it easier to plan, compare, and feel confident.
Consider this example about what it takes to live in a nice little town:
Merton said, “If I can visit you in your hometown and I said, ‘Hey, this is a nice town. I’d like to move here.’ Then, I looked at how you’re living and I said, ‘Well, I like the way you’re living. What would it take for me to live in your town like you?’ I doubt you’d say to me, ‘You need $3,637,550 in the bank.'”
He continued, “I think you’d say, ‘Well, if you want to live like me here, you have to be earning about so much a year, right?’ That’s how people would say. ‘You got to earn about that amount, you can live like me.'”
People naturally think in terms of income.
Why Most People Focus on Savings Instead
When pensions were the norm, income planning was built in. But with the shift to defined-contribution plans like 401(k)s, the focus moved to:
- Account balances
- Savings rates
- Market returns
- Net worth
These metrics matter, but they don’t reflect how retirement feels or functions. A large portfolio is only meaningful if it generates enough reliable income to meet your needs.
This disconnect creates confusion — and often fear. That’s why Boldin is designed to flip the script. Instead of obsessing over the size of your portfolio, we help you focus on what it can do: support your lifestyle, for life.
Robert Merton’s 3-Bucket Retirement Income Framework
In his Harvard Business Review article, “The Crisis in Retirement Planning,” Merton offers a three-part model for thinking about retirement income.
Category 1: Minimum Guaranteed Income
This is the money you absolutely need to cover essentials like housing, food, and healthcare. It should be guaranteed, inflation-protected, and last for life.
“It’s important for people to start figuring out what income they will have that is inflation-protected and guaranteed for the rest of their life. This will help protect a retiree from longevity risk, interest rate fluctuations, and inflation,” writes Merton.
- Sources: Social Security, defined-benefit pensions, and lifetime annuities
- Goal: Cover your non-negotiables with income that won’t go away
About Annuities
“To increase the amount of guaranteed income above and beyond those benefits, the pensioner would have to buy an inflation-protected life annuity from a highly rated insurance company,” says Merton.
Lifetime income annuities offer guaranteed payments for the rest of someone’s life. For example, let’s say a 60-year-old male purchases a $150,000 annuity today with 3% inflation protection. If he were to opt to start receiving payouts in five years, he would get around $700 a month for the rest of his life.
(Try your own calculation with Boldin’s Lifetime Annuity Calculator or as a scenario in the Boldin Retirement Planner.)
However, annuities can be inflexible investments and don’t allow for liquidity. Nor are they the most efficient investment. You aren’t going to get rich “investing” in an annuity. In fact, they are technically an insurance product.
“People who are uncomfortable with annuitizing their entire retirement portfolio should consider trading off some but not all of their guaranteed future income for alternatives offering more flexibility,” Merton advises.
This is why you would only want to put money into an annuity to cover the most necessary expenses. Having your needs covered can provide peace of mind.
Category 2: Conservatively Flexible Income
These are the expenses you really want to afford but could reduce if needed, like travel, hobbies, or family gifts. Here, you want safety and some flexibility.
- Investment style: Treasury Inflation-Protected Securities (TIPS), short-term bond ladders
- Advantage: Liquidity and inflation protection without market risk
A portfolio of U.S. TIPS can serve as a “more flexible but still relatively safe” alternative to annuities, Merton says. TIPS offer a periodic payout of inflation-protected income for a fixed period of time, called a “maturity.”
Portfolio interest income from the securities is combined with principal at each bond’s maturity to create income payments, resulting in no remaining capital once the payout period ends.
“There are two advantages to this type of conservative additional income relative to guaranteed income,” says Merton. “Because the savings can be held in liquid [U.S. Treasury] assets, they are available in whole or in part to the participant at any time, for medical emergencies or other lump sum expenditures.”
Category 3: Desired Extra Income
This is your aspirational spending, the lifestyle extras. Because these aren’t essential, you can afford to invest more aggressively.
- Examples: Luxury travel, second home, big gifts, philanthropy
- Investment style: Stocks, real estate, higher-risk assets
A Smarter Way to Plan for Retirement Income
Merton’s strategy is simple but powerful: Match the type of income to the type of spending. Use guaranteed income for essentials, conservative investments for flexible spending, and riskier assets for discretionary goals.
This approach gives you:
- Peace of mind that your needs are covered
- Flexibility to respond to life changes
- A structure that aligns money with meaning
Retirement income planning isn’t about chasing perfection. It’s about creating a flexible, durable strategy that supports your life, not just your balance sheet.
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