Summer Article Series: Retirement - Planning for the Unpredictable (Article 3 of 3)

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I have missed watching summer blockbuster movies in the theater. Until last year, my wife and I would regularly go to movies and look forward to the upcoming features shown in the previews. I am always especially eager for the newest action movies. My wife will go to action movies with me, but she often points out that they are predictable. She says action films always include at least one explosion, fistfight, shootout, car chase, daring rescue, and a hero who is forced to overcome incredible odds to defeat a dangerous villain and save the world. In spite of (or maybe because of) the predictability, I find them highly enjoyable. Maybe being predictable is not such a bad thing. Sometimes I wish more things in life were predictable. Like retirement. Wouldn't retirement planning be so much easier if we could better predict the future?

As a financial advisor, one of my main purposes is to help my clients plan for the unpredictability of retirement. For most of their working lives, that generally involves helping them grow their assets over time – wealth accumulation. However, in retirement, it is just as important to get advice on the spending of those assets – wealth decumulation. On the face of it, spending sounds easier than saving. I would argue, based on experience with several of my recently retired clients, that the opposite is true – wealth decumulation is more complex than wealth accumulation. When you accumulate wealth, you basically need to commit to a savings plan, choose an appropriate risk tolerance, minimize fees, diversify your portfolio, and stay invested. Wealth decumulation, on the other hand, involves many other considerations:

Set Up Your Income Sources
- When should you start to receive your lifetime income sources such as pensions and Social Security?
- When should you withdraw from tax deferred (401(k)s or IRAs) and tax exempt (Roth) accounts?
- When should you take RMDs (required minimum distributions)?
- Do you need other potential revenue sources such as home equity?
Estimate your Life Expectancy – I've heard several of my clients say that, ideally, the check they write on the day they die will bounce, meaning they have spent everything accumulated at just the right time. Realistic? Obviously, not. Just as we cannot predict what the market will do tomorrow, we can also not predict the timing of our death. What to do instead? A traditional rule of thumb is to plan on spending 4% of your assets per year. I think the real answer is more fluid than a rule-of-thumb and is best determined jointly with me, your advisor, to identify your individual, dynamic spending approach to increase the odds your spending levels will be consistent with your goals not only for your lifetime, but also for whatever legacy you may choose to leave behind.
Get Comfortable with Spending – One of the problems retirees often experience when spending is having the confidence to do it. In fact, a BlackRock study showed that most retirees have 80% of their pre-retirement savings after almost two decades in retirement and some even grow their assets during retirement1. One way to get more comfortable with decumulation is to use a bucket strategy. For example, by keeping short-term (1-2 years), mid-term (3-7 years), and long-term "buckets" of assets with appropriate levels of risk, you can feel more confident in spending down the assets in the short-term.
Be Smart about Giving – If leaving an inheritance to your heirs or donations to charitable organizations is important to you, then you will want to explore how to do that most efficiently. For example, you can make charitable donations directly from your RMDs to avoid paying taxes and still get the RMD credit.

The future is not as predictable as a good action movie, but we can plan for retirement by taking concrete steps to strategically manage the uncertainty. The ultimate goal is to spend your retirement years as you have always envisioned them, without worrying about your finances. If we can make that a reality, then you can just worry about getting the popcorn and watching the hero save the world, once again.

This article wraps up my Summer Article Series on retirement. I hope you now have more food for thought and have spent some time this summer contemplating the topic. I am happy to set up a time to discuss your ideas or questions in a meeting or we can also touch base in our next regular portfolio review. In the meantime, enjoy the rest of your summer (any good movies coming out?).

You can e-mail me at mhaertzen@wtwealthmanagement.com or call (520) 204-1058.

Sincerely,

Matt Haertzen, CFA, CFP

References:

Decumulation challenges and potential solutions.
BlackRock.

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