• Saving for Retirement with the Four-Box Strategy

  • by Austin Quinn

How can you secure your retirement? What kind of strategy will help you reach retirement as quickly as possible? There are many approaches used to manage retirement income, but among the many complicated and messy options available, the type of “income flooring” offered by the four-box strategy is among the easiest to understand. With the four-box strategy, you can gain a better understanding of your cash flow using a plan that compares your income and your expenses in a manner that’s easy to grasp.

The Four-Box Strategy Explained

Developed by financial planner Farrell Dolan, this method seeks to classify retirement income and expenses into two separate pairs of boxes. One pair deals with income while the other handles living expenses. Let’s describe each box and its purpose in detail:

  1. Essential Expenses – This box is meant to hold necessary living expenses that you’ll face throughout retirement. Predictable costs like mortgage payments, car expenses, and insurance payments would be covered by the money in this box. In general, it’s also a good idea to categorize emergency medical expenses here.
  2. Discretionary Expenses – Less important expenditures such as dining, entertainment, hobbies, and miscellaneous luxuries can be covered in this box. Of course, if you feel that one of your hobbies is essential to maintain your quality of life, you can place it in the “essential” category if you prefer.
  3. Fixed Income – All of your expected, guaranteed, and fixed income can go in this box. This would include things like Social Security income, pensions, Home Equity Conversion Mortgage proceeds, and other sources of income that will not change based on market shifts.
  4. Variable Income – This box contains non-guaranteed, unpredictable income such as distributions from an IRA, 401(k), or other contribution plan. It’s also meant to hold investment income and spontaneous income such as inheritances.

While the differences between these boxes seem clear-cut, there are some types of income/expenses that may blur the lines depending on the circumstances. For example, even regular income from an employer may be classified as variable income (especially if you are working a job that involves commission or tips).

Putting This Strategy to Use

The most important element of any saving strategy is to provide a useful way to organize your money while encouraging you to save as much as possible. The four-box strategy can allow you to accomplish this by categorizing your expenses so that they match up to your income. Ideally, the goal with this approach is for the guaranteed lifetime income from the third box (Fixed Income) to either meet or exceed the Essential Expenses found in box one. When a gap occurs and expenses surpass income, that imbalance should be funded using the least amount of money possible. At this point, retirees can evaluate their options and find solutions to help to bolster their Fixed Income.

Why Choose this Method?

What makes the four-box strategy better than any other? Why not put money in a piggy bank or hide your emergency fund under your mattress? Unlike other methods, this technique works due to its sheer simplicity and ease of execution. Overall, this method is designed to give you a clear picture of how your different types of income and expenses stack up against each other. With a clear vision of your current financial situation, you should be able to make more calculated decisions. If you notice a major discrepancy, you should have a better understanding of where it is coming from. This could lead to you making a superior decision when trying to eliminate problems. Of course, as simple as this strategy may be, personal finance is rarely simple. If you have questions or concerns regarding the four-box strategy, we recommend that you meet with a financial advisor to discuss your situation.