By Michael D. Bird, CFP®, MBA
For most, retirement savings is about increasing the size of your account so that it reaches some mythical “number” or achieving the amount of money you think you need at retirement. And then retirement appears and your thinking has to change. The number one question then becomes, how do you go from growing your savings to harvesting your savings? It’s one thing to have a lump sum in your account, but it’s another to have a check deposited directly into your account at the same time as your paycheck every month. Let’s look at the concerns and then some solutions.
The first concern is that your time frame of reference has changed. As a friend of mine once said, “My parents don’t even buy green bananas,” implying that they may not be around long enough to eat them. Okay, so that’s a little extreme. But “the long term” isn’t as long as it once was when you were working. Now that retirement has appeared, or will soon, many people get nervous about a market change that would take years for the account to recover.
Second, the closer people get to actual retirement, the more important it is to have more cash on hand. Maybe life has taught them the imperative to have a “rainy day fund.” That’s money in the bank, or in a guaranteed account, that is not invested and is there to handle expenses. As much as we’d like to have no emergencies, the reality is that unexpected expenses occur and you need to be ready. Maybe that comes with having lived long enough to experience it or maybe it just now makes some more sense. Regardless, cash becomes more important.
Third, you may not know it, but retirement could last a long time. For those couples aged 65, there’s an estimated chance of 1 out of 4 that one of you would be alive at age 95. That’s 30 years! Your money has to last that long (or longer) to avoid running out. That means your money needs to grow. And growth means investing. Investing in retirement has its own concerns. So, let’s look at some solutions.
Many people make the mistake of simply trying to do the opposite of what they’ve done all their life to grow their money. They keep the same accounts and the same investments but now they simply start taking money out. The problem is that many companies or advisors will take the money out of all the investments, based on how much is in the account. For example, your account has $500,000 in it and half of it is in one investment. The other half is split amongst 5 different investments. By taking out some from each, half of the monthly distribution would come out of the one big investment and the rest out of the other 5 equally. It’s called a pro rata distribution and the problem with it is that when the stock market is down, you could be selling your stock investments at the worst possible time. So, that’s not ideal.
Another method is to put most if not all of your savings into a particular type of investment, an annuity, for example. Needless to say, that investment had better perform the way that you thought it would, or your retirement could be jeopardized. I won’t go into all the things that go wrong; it’s better to realize that you don’t want to put all of your retirement savings into one product or account—no matter what it is. The number one principle in retirement income planning is flexibility. You will probably need to make changes as the investing world changes, and your strategy needs to be flexible enough to do that. The single strategy is also less than ideal.
One retirement concern is to plan on getting the returns in the stock market that you’ve been getting the last few years and expect that to stay the same throughout retirement. And then base your income and your retirement savings on that growth. The market doesn’t operate that way. At some point, a bear market (defined as a 20% or more drop in value) may reduce your retirement savings. Can you weather that decline? So again, planning on having strong, consistent returns every year is less than ideal.
One of the most common problems I encounter is going from a retirement saver to a retirement spender. Does that sound easy? Imagine saving your entire life for retirement. You’ve scrimped and done without. Now all of sudden, you’re supposed to just “flip a switch” and start spending. That’s a challenge for many, and one that takes looking at projections and considering the cash on hand.
Ultimately, one method that resolves a lot of these issues is to use multiple accounts managed for not only long-term growth but also with your monthly income in mind. In short, one account is there for your income needs, the second account is invested in different types of investments not in the stock market, and the third account is there for growth. If the cash account has enough cash, or what we call “near cash,” for five years, then the second account can potentially last for about 5 years, leaving your growth account to work hard in the market for 10 years without needing to sell anything. Knowing that 10 years of income may be set aside and available, regardless of what happens in the stock market, is comforting to a lot of people.
Regardless of whether you are retired or just thinking about it, it’s not too late to improve the structure of your retirement savings. And when your retirement income is healthy, that’s one ideal you can live with for a long time.
Michael Bird, a Financial Advisor with Secure Money Masters in Bristol, TN, is also an adjunct Professor of Finance and has taught at several universities and colleges, including ETSU, Belhaven College and the University of Memphis. He currently teaches a course on Social Security and how to integrate Social Security benefits with Retirement Income.
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Disclaimer: This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect my judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation as it does not address or account for individual investor circumstances. Please keep in mind that no single strategy is the best choice for all investors/retirees. Before investing, investors are encouraged to speak with a financial professional who can help evaluate decisions based on an investor’s complete financial picture and an investor’s time horizon and risk tolerance. Past performance does not guarantee future results. An investment in stocks or mutual funds can result in a loss of principal.