This 'flooring approach’ to retirement income is popular for the stability it promises — but here’s why boring isn’t always best for American retirees

What is flooring?

The flooring approach to retirement planning focuses on establishing a steady stream of income to cover essential expenses throughout retirement. The goal is to set a financial “floor” that ensures basic needs, such as housing, healthcare, and groceries, are covered with guaranteed sources of income unaffected by market fluctuations.

Typically, retirees accomplish this through a combination of Social Security benefits, pensions, and annuities — all of which offer reliable payouts that don’t depend on investment performance.

Many retirees supplement this “floor” with a secondary “upside” portfolio that can include stocks, bonds, or other growth-oriented investments. The upside portfolio is designed to fund discretionary expenses, like travel or hobbies, allowing for some financial flexibility. If the market suffers, only these non-essential expenses are affected, and the floor never falls out from under you.

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Why is flooring popular?

The flooring approach is attractive to retirees because it removes much of the uncertainty from retirement income planning. In an era when traditional pensions are less common and Social Security’s long-term viability is being discussed, many retirees seek the sense of stability the flooring strategy provides.

It also has the perk of allowing for consistent monthly budgeting, reducing financial anxiety and leaving more time for enjoying retirement without fretting over market swings. For retirees who remember the volatility of past recessions, or are simply risk-averse, flooring can bring a welcome sense of security.

With Americans living longer than they used to in previous decades, many are concerned about outliving their savings. Flooring addresses this by ensuring a portion of their income is secure for as long as they need it.

Pros and cons

Flooring offers significant advantages, especially for risk-averse retirees seeking peace of mind. With a guaranteed income to cover essential expenses, retirees can feel secure in knowing they won’t face financial hardship if the markets underperform. Those who aren’t comfortable with investment management find this approach straightforward: Because their basic expenses are covered, they can make more conservative investment decisions with any additional funds.

The strategy also minimizes the need for retirees to keep constant watch over financial markets, which is especially appealing for those who don’t want to actively manage their investments in retirement.

But the drawbacks are considerable. While stability is valuable, retirees who stick strictly to a flooring strategy may miss out on potential benefits. Since flooring often involves purchasing annuities or similar products, there’s an opportunity cost. Funds used to secure the income floor could otherwise be invested in higher-yield assets, potentially generating more wealth in the long run. By focusing heavily on guaranteed income sources, retirees may miss opportunities for higher returns that could enhance their quality of life. Annuities and pensions tend to offer lower long-term growth than stocks or real estate.

Many fixed-income sources don’t keep up with inflation, which can erode purchasing power over time. Retirees relying solely on fixed incomes may be challenged to maintain their lifestyles as costs rise.