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3-2-1 Newsletter (7-02-2020)  Thumbnail

3-2-1 Newsletter (7-02-2020)

10-Minute Read

Let’s get right at it. Here are three insights, two findings, and one action to take.


 I. 5 things you DON'T want to do to your retirement

Over the years, I have noticed a few crucial factors in improving retirement outcomes. These have proven to work against achieving retirement goals and things you don't want to avoid. While this isn't an exhaustive list, it highlights factors that often get overlooked.

  1. Don't assume a fixed withdrawal rate (here’s looking at you, 4% rule) because markets fluctuate, inflation wavers and spending varies over retirement. A dynamic withdrawal rate is superior because it protects against under and overspending while preserving spending power through retirement.

  2. Don't assume level spending through retirement, as this overstates costs that lead to oversaving before and underspending in retirement.

  3. Don't assume a conservative asset allocation in retirement, as studies inform a 50 to 75 percent stock allocation through retirement minimizes the impact of inflation and preserves spending power should unexpected costs or a longer-than-expected life materialize.

  4. Don't assume a stock and bond portfolio is the best asset allocation. Studies support that the best method to meet the two competing retirement financial objectives of satisfying spending goals for life and preserving financial assets for legacy and liquidity is a combination of stocks and annuities, not stocks and bonds.

  5. Don't assume a pro-rata withdrawal strategy in retirement, where money is taken from various accounts in no specific order. A sequential withdrawal strategy where money is taken first from taxable, then tax-deferred, and lastly tax-free has proven superior by preserving assets, reducing taxes, and increasing savings, especially when coupled with Roth conversions.

 II. Why Use a Retirement Income Plan in The First Place?

The difference between having a retirement income plan and not having one is simple: one is flying by the seat of your pants, and the other is executing a strategy. People don’t wake up one day and run a marathon. Runners build up their ability to run long distances over time. They start small and plan for the large races. Similarly, people who plan on retiring don’t wait until they reach retirement age and begin planning. As runners build up their ability to run longer distances, retirees build up the resources and adopt the strategies that best support a desired retirement lifestyle. Does this begin with a comprehensive retirement income plan that answers key questions such as what retirement looks like? When can I realistically retire? How much can I spend each year and still make money last? 

The simple fact is that you cannot build a plan to get there unless you know what you are trying to accomplish. And the best way to get there is to find answers to the many questions part of a comprehensive retirement income plan that includes strategies to address these questions and meet the various goals and address the multitude of risks.

III. 10 things your retirement income plan should include

I have said it before: saving for retirement is challenging but figuring out how to spend sustainably in retirement is exceedingly difficult. And while the latter is manageable, it’s made immeasurably easier by having a comprehensive retirement income plan that covers key elements. 

Here are a handful of key elements your retirement income plan should include:

  1. Assess the current financial situation

  2. Identify and prioritize retirement goals

  3. Estimate retirement income needs

  4. Identify sources of income and assets available to generate income

  5. A preliminary calculation to determine retirement preparedness

  6. Select strategies to address any shortfalls

  7. Consider legal and tax issues that could derail the plan

  8. Stress-test plan: consider retirement risks

  9. Determine appropriate strategies for converting assets into income

  10.  Circle back and repeat to address any road bumps along the way

Retirement planning, like most planning, is an estimate of your best guesses at the time. And we know estimates are not static. It’s an interactive process you’ll repeat repeatedly to get right. There is no shortage of unknowns in retirement. From how long you’ll live to how the markets will perform to what health issues will materialize to how much inflation will increase -- the list is long. But including these key elements (and others) in your planning will put you and your retirement in the best position possible to achieve the desired outcome. 


I. [video] How Much Retirement Income Will You Need? 

If you have not already retired, one of the most powerful things you can do is sit down and figure out what you want your retirement to look like. But most people don't. They are just throwing money at their portfolios, hoping everything works out. This isn’t the worst you can do, but it’s not optimal either. 

The simple fact is that unless you know what you are trying to accomplish, you cannot know how much retirement income you will need. Bob French from Retirement Researcher shares two and a half ways to help determine how much income is needed. The Replacement Ratio is popular with many retirees as it seeks to estimate retirement costs based on a portion of the pre-retirement income, usually in the range of 70-85 percent. The Budgeting approach is preferred by those who want a bit more precision in estimating retirement income needs as it is based on the actual anticipated expenditures themselves. The final (half) approach is guessing a big round number and refining it the closer you get to retirement. 

What this means for you: Are you the same person you were 30 years ago? Do you want the same things now that you did back then? Probably not. Your needs, concerns, and desires evolve, and so will your retirement income needs. That's OK because you don't need to get everything right. At least right away. No one approach is a perfect fit for everyone. Finding and sticking with the approach you’re most comfortable with is important. The key idea is to get the amount of income needed in the right ballpark and make adjustments from there, realizing that it’s a moving target that you’re constantly adjusting it to fit your needs. 

How Much Retirement Income Will You Need? 

II. What is the “retirement spending smile”?

 Assuming a constant inflation-adjusted spending level through retirement can lead to oversaving for retirement. This places an unnecessary burden on an already challenging task of saving for retirement. An alternative retirement spending model is the Retirement Spending Smile which reflects fluctuating spending levels during retirement. We know about retiree spending patterns across retirement: it peaks early in retirement, is at its lowest at age 83, and increases in later years. For a retiree, basing their spending on this type of retirement spending model would allow retirement to begin with almost 15% less saved than otherwise.

What this means for you: Your retirement could cost up to 15 percent less than originally thought by assuming a spending model that varies throughout retirement versus one based on the level of spending through retirement. 

 Source: What Is The "Retirement Spending Smile"?


I. What can you work on today that will continue working for your retirement?

Prudent retirement income planning begins with identifying and implementing the actions necessary to support the goals while protecting against risks that stand in the way of those goals. Undertaking the right actions consistently before and during retirement is crucial to your golden years. 

We’ll look at one action item to take and reveal a new one each week.

This week’s smart habit: What can you work on today that will continue working for your retirement?

Achieving the retirement of your dreams is never a certain thing. Too many unknowns and things beyond our control make this a challenge for all but the wealthiest. The best you can do is focus on what can be controlled — and plan for what cannot. And that begins with identifying and focusing your attention on the things today that will continue to work for your retirement, whenever that may be. So, what could this "focus" look like?

Below I have put together a few areas to help you get started.

  • I am focused on building income sources as opposed to accumulating assets.

  • I am focused on planning for risks instead of ignoring them.

  • I am focused on actual versus imagined retirement income needs.

  • I am focused on income security rather than wealth accumulation.

  • I am focused on meeting realistic, not unrealistic, retirement goals.

This is no exhaustive list but it should get the juices flowing to jumpstart your thinking around the focus to take today that will pay dividends down the road in retirement.


Have a Question? Want to chat about it?

Get In Touch

Until next week,

Mark Sharp, CFP® RICP® EA

Mark Sharp Retirement