Almost every investor has to go through the awkward transition of moving from the accumulation phase to the distribution phase when they go from having a paycheck to living off what they have spent their entire life saving.
Our approach in making this transition is based on how much you spend once you stop working. We begin by taking a look at your income sources, such as, Social Security income, pensions, annuities, royalties or rental income. We then determine how much you are currently spending and your desired spending after tax in retirement. The difference between the two is the liquidity need that is fulfilled by your retirement savings. The goal is to keep your spending in check and at a level that will allow your assets to last through your lifetime. By developing the plan 10 or more years prior to your retirement, you have time to save more, work longer or modify your lifestyle if that spending level is not enough.
At Henssler, we determine your individual spending needs for 10 years, and invest that money in a laddered bond portfolio. This removes those assets from the volatility of the stock market and eliminates the need to achieve a certain level of dividend income. This should also minimize the chance of having to sell your assets in a down market. Your bonds mature when you need the income. While that money is there for you to spend over the next 10 years, the rest of your portfolio remains invested in the stock market, hopefully growing at a rate that can offset what you are spending. At some point most every investor spends their principal, and that is something most investors don’t realize. Even if you do spend down your principal, you should only be spending at a rate that allows your assets to last through your projected lifetime.
A common misconception is when investors assume they need a 4% dividend from their retirement portfolio to cover their spending needs. However, just like stock investments, an equity dividend is not guaranteed. If the market were to drop 10% and the value of your portfolio decreases, that 4% you need from your portfolio actually increases. This puts you in a situation where you will need to pull more from a portfolio that is already down.
There is no rule of thumb for retirement, yet most investors ask “How much do I need?” or “When can I retire?” We believe the answers do not lie in the balance of your portfolio, but in your plan. The cornerstone of the financial plan is determining your spending needs and setting that money aside. Creating the plan is a comprehensive process that requires detailed conversations that are unique to each investor. We have seen clients with millions of dollars of invested assets whose projections show that they are in danger of running out of money. Likewise, there are investors who have a half a million saved and are perfectly on track. This has nothing to do with age or current income—it has everything to do with how much they spend each year.
It is also important to keep in mind that your liquidity need is also taxable income. Depending on where you pull those funds from—an IRA, a 401(k), a brokerage or savings account—it affects your taxes differently. This is another reason why you don’t want to make the decision on where to pull the money from a year before retirement. The further ahead of retirement you begin to plan, the more flexibility you have. If you begin planning 10 years prior you have the time to spread out your savings among tax-free and tax-deferred accounts so you are able to pick and choose which bucket you withdraw from.
If you have questions regarding your retirement assets, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
