Many struggle with the transition into retirement. Not only due to the sudden 40+ hours a week that need to be filled with new hobbies such as golfing, gardening and grandchildren, but also the mental aspect of spending when you’ve saved through decades of working years. Difficult questions arise such as “where should I withdraw cash for expenses?” and “what does income look like once the paychecks stop?” While the answer to these questions will likely change over the years, technology has given us a tool to combat uncertainty: automation. In creating recurring distributions from investment accounts, retirees are able to closely replicate income flows from prior years. In doing so, the risk of overspending in retirement is greatly reduced while simultaneously continuing an accustomed lifestyle.
Automate Distributions
One method that is frequently utilized to elect an appropriate retirement withdrawal strategy is to simulate employment paychecks through portfolio distributions. This can be established using four simple steps:
- Review after tax income in the years leading up to retirement.
- Determine all retirement income sources-- these may include social security, pensions, and annuities.
- Identify gaps between the monthly amounts of pre and post-retirement income.
- Establish automated withdrawals from your investment portfolio to fill those gaps.
This strategy allows for a smooth transition into retirement by providing a consistent stream of income.
While this may be optimal from a cash flow perspective, it comes with two major considerations. First, keep a close eye on your annual portfolio withdrawal rate. The 4% rule of thumb is a good place to start, but it’s important to incorporate any withdrawal rate with personal goals and an appropriate asset mix. Second, while distributions should be automated, the same cannot be said in regards to raising cash in a portfolio. Carefully examine holdings and allocation when assets must be liquidated. A retirement portfolio should hold a consistent asset allocation while simultaneously managing capital gains (depending on the account type). For more information on structuring portfolios and why your portfolio will likely differ from your parents, check out our post here.
Don't Just Set and Forget
Once automated income streams are created, slight adjustments will likely be made. Just as wages typically increase over time, so do expenses. In keeping portfolio withdrawals automated, individuals are able to more accurately determine when distributions must be increased or even decreased. This prevents dramatic changes to lifestyle in retirement, which is often the leading cause of failed financial plans. Not only that, but automation also creates predictability. Predictable behavior helps solidify a financial plan, allowing for more fine tuned recommendations to be made such as social security claiming strategies, Roth conversions, and optimizing a tax efficient withdrawal strategy.
Minimize Fear and Doubt
The alternative method for taking distributions only when needed comes with an increased risk of doubt. The doubt that the market is slightly down and it might not be a good time to take out money. The doubt that one distribution might come at the cost of taking another. Or worse, the doubt that a distribution isn't necessary in the first place causing goals and desires to be put on hold. We spend our whole lives saving in order to enjoy our years in retirement. There should be no room for doubt when it comes to how we spend those years. Automating portfolio withdrawals takes much of the doubt and uncertainty out of meeting retirement needs.
Maintaining a consistent lifestyle is one of the key contributors to a successful retirement. Automating income streams can help keep spending habits consistent in the early years of retirement which more often than not will ensure they continue late into life. There should be no room for financial uncertainty in the years that are meant to be our best. Be sure to utilize available technologies to help make your retirement as enjoyable as you hoped it would be. If you are interested in learning more about the withdrawal strategies you can utilize in retirement, check out our free eBook below!
Joe Crowley, CFP® is an Investment Advisor at Exchange Capital Management. The opinions expressed in this article are his own.
