Monument Resource Center
Our clients hire us because they recognize the value of our Team’s unique, straight-forward, unfiltered opinion and our tailored advice designed to answer their questions, not everyone else’s. Below, you’ll find some of the most important questions we have been asked over the years to help you better understand the role we play and the advice we give.
Retirement is the ultimate financial “destination” for many and represents a dramatically different reality than their working years – there’s no longer a steady paycheck to comfortably rely on.
When it comes to managing retirement income, there are many things to plan for both leading up to and throughout retirement to make sure you are financially unbreakable. Just like a long road trip, retirement won’t be without hazards and externalities that can impact your financial well-being.
Having a solid roadmap that serves as a guide but allows you to adapt and recalibrate as needed is critical to living life comfortably in retirement without the constant anxiety that your nest egg will run dry. We met with Christine Benz at Morningstar to discuss strategies for managing your retirement income and living the post-career life you’ve always dreamed of.
6 Tips for Managing Retirement Income
If retirement is on the horizon for you or if you have already taken the leap, you may have amassed savings and wealth but aren’t sure how to go about living off of that in retirement. Moreover, you may not have thought about “sequence of return risk”. This is simply the idea that taking money out of your investment accounts when the market is down can impact the long-term value of your account and increase the risk that your money may go to $0 before the end of your life.
Here’s what you should consider to make the most of your hard-earned savings, manage risks that are outside of your control, and live the life you’ve always dreamed about in retirement.
1. Set Clear Retirement Goals
Everyone has different priorities when it comes to how they want to use their wealth. Some will have a bequest motive—in other words, money left over for charitable giving or inheritances. Alternatively, you might want to enjoy your assets to the fullest in the here and now. Your retirement goals will affect your overall portfolio management strategy in retirement, so it’s important to set clear goals as you’re diving into the planning process.
When considering your goals, it’s also important to think holistically. Outside of retirement planning, are there other financial aspects to consider such as paying for a child’s higher education, planning an upcoming big vacation to celebrate retirement, healthcare costs that you can foresee, and more?
Consider these aspects carefully, as your goals will have some bearing on your overall withdrawal and income strategy. The 4 percent guideline (taking 4% of your portfolio initially in retirement and adjusting annually for inflation) is a widely-recognized withdrawal strategy for many people. It won’t fit everyone, especially if your goals require larger cash outlays at different points in time or if you have a desire to leave wealth for the next generation. It may also need to be adjusted year over year based on market conditions and the amount left in your accounts. This can make your spending lumpy as you move through life stages. Variable withdrawal strategies rooted in careful cash flow planning and projections may be more realistic for retirees with complex and evolving life goals and situations.
2. Prepare Your Portfolio for Retirement
As you near retirement age, it becomes more appropriate to make portfolio adjustments. You should start this prep work a few years ahead of time – ideally about five years before you make the official leap into retirement, as this is where sequence of return risk can be most pronounced. To this end, you may want to think about the bucket system.
In the bucket system, you would have a collection of different assets such as:
- Safe assets to meet a couple years’ worth of withdrawals
- Moderately safe assets, like high-quality short and intermediate bonds to meet 5 to 8 years’ worth of withdrawals
- Growth portfolio for longer-term planning to out-earn inflation
Managing your retirement assets with buckets ensures that you can access the funds you need without sequence of return risk impacting your long-term savings.
Having a safe bucket of cash ensures you can cover your needs during a down market. Otherwise, you may be forced to sell investments while their value is down, exponentially impacting the long-term value of your portfolio. Holding onto those long-term investments is crucial to ensure portions of your portfolio carry you through the later years of retirement.
Setting up these buckets is not a “set and forget” strategy, either. It’s essential to rebalance your portfolio as market conditions change. If your short-term bucket of cash gets emptied as you maintain your lifestyle during a down market, then you’ll need to refill that bucket when the market allows for it.
3. Reduce Portfolio All-In Costs
You may also want to reduce portfolio all-in costs and move toward more low-cost investments. Additionally, you may want to enlist the help of a wealth advisor, but make sure that you are getting good value for your money. Some people may prefer an hourly model while others want more comprehensive financial planning and advice.
One way to think of this is with the analogy of belonging to a subscription service for your medical care. If you pay for unlimited access to a doctor but the only service you utilize every year is a blood pressure screening, you can buy a blood pressure cuff and do it yourself. If you find that you do not need the comprehensive look at your health, you may not need that subscription service.
The same is true of wealth advisors. If you aren’t using them for holistic planning advice, then it may be time to transition to just an hourly model where you can get the help you need when you need it and nothing more. They can help you rebalance on a regular basis to make sure that your portfolio is in good shape as you move toward retirement.
That said, don’t underestimate the value of a good wealth advisor. Depending on your portfolio, goals, and financial needs, you may benefit from one that’s more involved – even if that means spending more to get the strategic advice you need.
4. Consider Working Longer
If your retirement plan is tight given your goals, then you may want to consider whether working longer is the right move for you. Many people do not want to consider this, but working can provide a reliable source of income that helps you grow your retirement savings and should be on the table to increase the sustainability of your retirement plan.
That being said, working longer may be a non-starter for many people, like those with physical limitations that keep them from working.
However, if you can, there may be good value in continuing to work and staying engaged in your current lifestyle. One study found that delaying retirement by 3 to 6 months had the same impact on the retirement standard of living as saving an additional 1% of labor earnings for 30 years. Even a modest delay to your retirement plans can impact your available funds during the rest of your golden years, especially if market returns in the years leading up to retirement are below average.
5. Adjust Your Current Lifestyle
Before you dive headfirst into retirement, it may make sense to make changes to your lifestyle that bring down your living expenses. For example, a couple living in a Chicago suburb will face high overall living expenses and property taxes. While they may be able to afford this into their retirement, opting to slash living expenses would stretch their retirement savings farther.
To do this, they might sell their home and move further out from the big city. This move cuts their living expenses substantially while only adding an extra 20-minute commute via public transportation to the city they love.
For you, it might mean selling your house and moving to a lower-cost living area or evaluating things like subscriptions, the costs of maintaining a larger home than you need, and expenses that represent conveniences you required while you were a busy professional. Even with a large portfolio, you may want to consider what you can do to cut spending in your current lifestyle, especially if your goals require your funds to last beyond your lifetime. This will help the income you receive from various sources stretch farther during your retirement years.
6. Plan for Taxes and Inflation
There is one thing for certain that all retirees need to plan for: taxes. Taxes can negatively impact how much you receive from your various sources of retirement income. However, there may be many opportunities to reduce your taxable income to make your overall funds go farther. When it comes to tax planning, it’s best to work with a tax planning professional and look ahead rather than wait until April 15th. Which accounts you pull money from each year should also be carefully strategized to reduce the impact of taxes throughout your retirement.
In addition to taxes, you also need to consider overall inflation rates during your long-term projections—although creating a personal inflation rate may be a more accurate calculation. For example, if you know that you do not spend much time behind the wheel of your car, gas price inflation may not impact you as much as inflation in other categories. In other words, inflation costs may be less worrisome than you thought depending on the lifestyle you lead and how that might change when you are no longer working.
All of these considerations require both diverse investment allocations and diverse account structures. If the majority of your funds are in tax-deferred Traditional IRAs or 401ks when you retire, you will have less tax-planning flexibility than someone with Traditional IRAs, Roth IRAs, and general investment accounts. Additionally, a diverse investment allocation means more than just buckets to protect short-term spending. Inflation-protected investments like Treasury Inflation-Protected Securities (TIPS) and I-Bonds may have a place in a diverse portfolio along with stocks to reduce the risk that inflation eats away at your purchasing power. This takes years of careful planning leading up to retirement and doesn’t happen overnight.
Manage Your Sources of Retirement Income with Confidence
After a lifetime of building wealth, you don’t want to spend your golden years worrying over your quality of life. With forward thinking and a strategic approach to managing your income and spending, you can ensure your assets not only cover your needs, but also provide for the life you want to live.
Are you ready to dive into your retirement savings plan to see if it is sufficient for your needs now and into the future? Reach out to us today to start talking about managing money in retirement and how we can help you better prepare! See if Monument Wealth Management is a fit for you in just 30 seconds.
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