Why You Need A Retirement Income Distribution Strategy

Retirement

Getting to the top isn’t the finish line…

Pexels.com (Joyston)

I was standing at the top of the highest point in Africa – Mt. Kilimanjaro – with friends and clients several years ago. I considered all of the hours of meticulous planning and training that went into the successful five-day hike to the top. While struggling to catch my breath at nearly 20,000 feet above sea level, I had a somewhat disturbing epiphany. My journey was not over. In fact, it was far from over. I was standing on top of a mountain in the middle of Africa and I had another 15 hours of hiking ahead of me. The summit was not the finish line. Not even close.

When I think of traditional retirement financial planning I think back to my thoughts on top of the mountain. Advisors and their clients spend a great deal of time accumulating assets, investing them, cutting expenses and taxes, and building a large retirement nest egg. Once we take the plunge into retirement, we think we’ve reached the pinnacle and the finish line when, in fact, we’ve reached neither.

Of course, we should spend time and energy in the accumulation phase. This is a necessary component to a successful retirement. So yes, we need a retirement accumulation strategy, but just as important (and often neglected), we need a retirement distribution strategy. This takes the form of a plan to withdraw income from your investment portfolio – also called a retirement income distribution strategy. A good retirement income distribution strategy is a plan that answers the questions:

  1. What is a safe amount of money we can withdraw from our portfolio with little risk of running out of money?
  2. How should my investment portfolio be allocated in retirement?
  3. What amount of risk am I comfortable taking and what level of portfolio risk am I able to take?
  4. What guardrails do I need to set up so that I’m not withdrawing too much?
  5. What is the best time to take Social Security?
  6. What other sources of income aside from my investments and Social Security do I have access to (e.g., pensions, reverse mortgages, rental properties)?
  7. What are the best use of my assets in retirement?

To be sure, there are a lot more questions and issues that need to be considered in order to create a sustainable income in retirement, but these are a few of the big questions. I have spent a great deal of time researching various retirement income distribution strategies for my PhD in financial and retirement planning. A good deal of the program was focused on the methods retirees can take to create a sustainable retirement income distribution plan. I had the honor to work with Dr. Wade Pfau, one of the leading academics studying retirement income distribution. In his book, How Much Can I Spend in Retirement, Dr. Pfau suggests there are two schools of thought regarding retirement income planning: probability-based and safety-first approaches. The latter approaches the retirement income solution by matching fixed and essential expenses with reliable income from Social Security, pensions, income annuities, and bonds. The probability-based approaches utilize what we’ve learned from investment portfolio withdrawal strategies such as safe withdrawal rates (think the 4% rule) and others. In talking to Dr. Pfau, he suggests, “A first step is to determine which style is right for you. This lets you figure out what role the investment portfolio will play within the overall plan and how to make your spending and asset allocation decisions.”

Creating a sustainable retirement income distribution plan when you retire is paramount. The decisions you make as you enter retirement are key and can make or break your retirement success for two reasons: (1) you no longer will have earned income and the safety of getting a paycheck every couple of weeks deposited into your checking account and (2) you will have several decades where your portfolio and income sources need to pay your bills and sustain your lifestyle. This is not the time to wing it and to hope for the best. If you plan properly, you can have the financial confidence to enjoy retirement and the peace of mind that you are on the right track.

Products You May Like

Articles You May Like

Why You May Not Want To Retire, Seriously
How to cut college costs, one dollar at a time
A New Approach To Financing Retirement
Should I Fire a Family Member
Why that 30% rule of thumb about credit card use could be costing you

Leave a Reply

Your email address will not be published. Required fields are marked *