Retirement Distribution Planning
The Challenge Facing Retirees Today – Outliving their planned retirement income
Today more than ever before, America’s retirees face an important question, “Do I have enough money to provide income for the rest of my life?”
Knowing if you have enough money to retire, and then planning to make that pool of money last as long as you need, is the focus of the our Retirement Income Planning Process. Working with your Guide My Finances to create a NextPhase™ time-segmented income plan can help answer the key question: “Do I have enough retirement assets to last my lifetime?”
Why You Should Plan For Retirement To Last A Lifetime
The assets from which you expect to create a vital stream of income during retirement face risk from economic turmoil, interest rate uncertainty and market volatility. As you move from asset accumulation (saving money for retirement) to income distribution (spending money in retirement), positioning your investments to provide a primary income that lasts as long as you need becomes more complex and difficult to manage.
*These examples are for illustrative purposes only, are not intended to reflect an actual portfolio or investment, and do not take into account taxes or fees that may be incurred in such an investment. If taxes and fees were taken into account, performance would be lower. Period return reflects the return of the S&P 500 index which is a composite of the 500 largest stocks in the U.S. Index past performance is not indicative of future results. Investment values will fluctuate so that shares, when redeemed, may be worth more or less than original costs. The index is unmanaged and unavailable for direct investment. These examples assume reinvestment of capital gains and dividends and no taxes. Data source: Lipper, Inc.
When saving for retirement, the order in which the rates of return are realized does not affect the amount the portfolio accumulates. It’s the total return over time that matters.
Let’s take the example of an investor who makes a lump-sum deposit of $132, 637.54 in the S&P 500 index on Jan 1, 1955, and then lets it grow untouched for twenty years. Notice that the average annual return of each portfolio was identical at 8.2%. However, the order in which the rates of the return were realized are reversed in the second portfolio. The end result is that both portfolios accumulate to the same $500,000.00 dollars.
But, in the income distribution phase of retirement, the order in which the rates of return are realized can DRAMATICALLY affect your portfolio.
During the distribution phase of your life, the order in which the rates of return are realized will affect your portfolio’s ability to sustain itself and not run out of money. If we take the accumulated portfolio from above and plug it into two illustrations where different sequences of returns are applied, you will see a dramatic difference in the sustainability of the funds in the portfolios.
The first portfolio accumulates to $725,599.77. But, when realized rates of return are reversed in the second, it runs out of money in the 14th year.
Research shows people are living longer in retirement than ever before, and you may need to plan for 20, 25 or 30+ years in retirement. Are you confident that you will be able to make the right choices to have income for life? There are many strategies that are designed to moderate the risks of fluctuating market returns.
Can I Afford To Do It Myself?
Decisions you make on how much to withdraw during retirement are crucial to maintaining retirement principal and limiting the possibility of running out of money. Investors who begin withdrawals during negative years will have substantially different results than investors who begin during positive years. Working with a qualified financial advisor can help you create a plan to reduce the risk of completely depleting your portfolio.
How Does It Work?
The Guide My Finances NextPhase™ plan outlines an income plan designed to span your lifetime plus a system for dividing up investments into multiple time-segmented pools with different growth and security objectives. The chart below is an example of how the NextPhase™ plan works. Planning closely with your advisor, your retirement assets are gathered and divided among an optional guaranteed income asset and numerous pools of investments that range from conservative to more aggressive. The optional guaranteed income segment and the first pool offer immediate, regular income streams, while the other pools of investments are designed to grow over time. The more conservative pools (shown in purple and blues below) are larger with shorter time horizons. The more aggressive investment pools (shown in orange, gold and red below) are smaller initially with longer time horizons so they have the potential to grow. As time goes on, each pool is drained to fill the reservoir that provides your regular income stream. The strategy typically plans for 25 years, at which point the last pool can be divided up again to provide for a longer retirement or used for legacy planning.