The switch from working to retiring and living off savings is a major transition. To be successful, individuals and their financial advisors must switch from an accumulation mindset to a distribution-focused way of thinking. After all, retirement planning is much easier during the accumulation stage — they’re just focused on growing the nest egg. The real challenges set in when changing to a distribution strategy.
Upon retirement, it’s time to bust open the nest egg and begin withdrawing. With that comes a goal shift. It isn’t just about establishing a bucketful of cash; it’s about acquiring enough income to survive without letting the nest egg diminish completely.
Economic Attitude Changes: Everything Reverses
Kevin Canterbury of Redstone Capital Management says that to ensure monetary happiness throughout retirement, individuals and their advisors must carefully monitor withdrawal rates and account values to prevent hitting that scary $0.
But many find the mindset change challenging because everything they were previously doing must be reversed.
For example, dollar-cost averaging is flipped. Generally, investing fixed amounts throughout volatile markets ensures more share allocations when the prices are lowered. While this is great during accumulation, withdrawing fixed amounts from a volatile collection can cause damage, making it tricky in the distribution phase.
Alongside that, compounding is reversed too. Individuals who built up an investment account early benefitted from increased future compounding. However, it must be handled differently once people reach retirement — withdrawing too much too soon diminishes compounding interest on the remaining value.
And, scarily of all, mistakes in the distribution phase can be fatal. The wiggle room for errors is near-non-existent when money is flooding out of retirement accounts, but nothing is coming in.
Income Planning for Retirement
For a successful transition into retirement, individuals should learn a few core nest egg management concepts. Volatility, excessive withdrawals throughout early retirement, and longer-than-anticipated withdrawal periods are all major considerations.
Finance professionals are well-skilled in deciding which strategy works best for their clients. But the most popular are:
- Living off interest or dividends — Individuals alter their growth-oriented portfolio to one where their investments generate income. It’s perhaps the most loved retirement strategy and typically includes bonds and dividend-receiving stocks.
- Drawing from cash buckets — Here, retirees keep enough dollars in a money-market fund for two to five years of expenses and invest the rest of their portfolio for total return. Through long-term asset liquidation, they replenish the bucket over time.
- Creating withdrawal plans — With this strategy, individuals invest for total return and create a withdrawal plan at 4% of the balance. Each year, the withdrawal increases according to inflation.
Selling Assets: A Key Part of Switching from Accumulation to Distribution
Finally, liquidating assets is generally a vital part of the switch from accumulation to distribution. Therefore, considering the tax and investment implications of selling assets is essential.
Ideally, retirees should meet with their financial planner if an overhaul of their portfolio is needed to guarantee their nest egg will remain full.