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Determining Retirement Income Needs - Part 4

Determining Retirement Income Needs - Part 4

| January 24, 2024

Well, folks, we made it to week four on a hard topic - determining your retirement income needs. As promised, we are going to talk about buckets, that is the accounts and investment types your retirement money is stored in until you use it!

The best way to approach these buckets is to align your investment strategy by goal which allows you to take on different levels of risk based on varying time horizons. This also helps to ensure you are saving enough to accomplish all of your goals – not just the ones that occur first. Here’s an example of how that works and into which types of investments these different buckets would be invested.

Historically, bear markets and their recovery have seldom lasted more than 5 years from peak through market bottom to full recovery. Many planners, myself included, will recommend having, as a minimum, say 5 years, of projected annual portfolio drawdown in investments that fall in the lower end of the volatility scale. The five years of income are referred to as “buckets of money”

This illustration shows a scenario where an investor might have two years of projected drawdowns in cash, CDs, and other low-volatility, short-term investments. The buckets for years 3,4, and 5 are shown invested in potentially more volatile investments. The concept here is that the hypothetical retiree will have two years of income coming from very low-risk investments, to complement the income from Social Security and pensions. The investments for subsequent years (3,4, and 5) income may be able to tolerate some more volatility as they are given the time to potentially earn money while years 1 and 2 are being drawn down.

 

When building your income./drawn-down plan, it may be useful to match dependable income sources with regular retirement spending, while coordinating income-oriented solutions and a cash reserve to meet more variable expenses. Aligning your objective with your desired outcome can mean several goals for your portfolio – current income, growth, sustainable withdrawals, and/or protected income. To find the right balance, your projected outcome from your retirement plan can help you identify which of these to consider making a priority for your diversified portfolio.

Now that we’ve determined your income needs, it’s time to define the right allocation for you. A conservative investor will have five years worth of income protected, a moderate investor will have three to four years, and an aggressive investor will have two years' worth of income protected. EVERYTHING ELSE is emotional. If you look at the information above, you’ll see the account of what we consider a conservative investor. Again - everything that goes into this investor’s portfolio is based on his date and dollar-specific plan that was created with the information he and his advisor (me) learned through the information gathering and income planning process. 

I hope I have given you some good tools and information this month to start thinking about how to allocate and draw down your money. However, there is no substitute for good financial advice and a guide to lead you through this critically important process, so I encourage you to work with an advisor you trust regardless of what phase of retirement you are in from pre- to post-retirement.

Until next time…

One last thought: we believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. 

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.