Would you believe that investing is the easy part and that spending is the hardest part of retirement? From our perspective, it’s true. Saving and investing merely takes discipline. Always pay yourself first and stick with your investment strategy even through turbulent market conditions. Spending, however, involves more variables, more flexibility and more emotions—especially when it comes to spending principal.
At Henssler Financial, we plan for clients’ retirement liquidity using the Ten Year Rule, investing the money needed for living expenses in fixed-income investments that mature the year the funds are needed, thus protecting the principal from the volatility of the stock market. We do this for a rolling 10-year period, meaning in 2021, we are allocating funds for your 2031 needs. We do this to avoid being forced to sell stocks during a down market. Should 2022 be a down market, we can wait out the downturn for a few months to a few years to fulfill the liquidity needs for 2032. Since World War II, bear markets have lasted about 13 months on average, with the longest bear market coming in at 31 months. We believe if you have spending needs fulfilled for 10 years, you don’t have to panic and sell your stocks during a two-and-a-half-year recession.
Depending on how much a client has saved for retirement and their spending needs, some may spend down principal throughout their retirement—and that is OK. By thoroughly analyzing a client’s spending, we develop a comprehensive plan using conservative variables for inflation and market growth to plan for the assets to last through age 100, aiming to ensure the client does not outlive their assets. Other investors may receive so much retirement income from Social Security, pensions, rental income, dividends, or inheritances, that they essentially have no liquidity needs, which means they have the ability to take on the risk of having their portfolios invested 100% in stocks. Potentially, even required minimum distributions from IRA accounts, could be taken in stock instead of cash.
That said, other investment strategies do exist. We recently worked with an investor who had all of his retirement income invested in an equity income portfolio with his annual spending needs fulfilled by dividends. He and his adviser aimed to keep roughly $100,000 in his “liquidity account.” As the investor spent cash, the balance would decrease but then increase as dividends were paid. He never touched principal that was invested in dividend-paying stocks.
While this is certainly a viable strategy, it does involve a significant risk because companies can suspend a dividend payment at any time. This strategy also generally requires a higher level of capital. Though it can be a conservative spend-down plan, the investor who chooses this path must be OK with adjusting their spending should dividend payouts decrease. Furthermore, any large expenditure would need to be fulfilled by the portfolio principal, increasing the risk that one might have to sell stock investments in a down market.
All investing involves risk. The strategy you choose attempts to mitigate that risk. As an investor, you have to be comfortable with the amount of risk you are willing to take. Working with a financial adviser can help you project the possible long-term results of your strategy.
If you have questions on how to begin shifting your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166