Money Is Money

One of the most challenging financial periods in life is the transition from working life to retirement, (what we call the “Wind Up” phase). Many clients believe that because they are moving towards retirement, their investments should be dramatically re-oriented so that current income is the primary objective. This usually is not the case because of the duality of longer life expectancies and ever rising living costs. I can attest that most individuals in the “Wind Up” phase of their lives have a stilted concept of how these two variables impact their future.

The most reliable source of income for regular expenses in retirement is from growth in your globally diversified portfolio. Other than some tax considerations, it makes little difference if the income is derived from interest, dividends or capital appreciation. Money is money.

Planning For Possibilities

Someone who is 55 years old today has experienced an average inflation rate of 3.8% per year during their lifetime. To maintain your pre-retirement lifestyle, your overall portfolio return will need to exceed increases in living costs. With most bond type investments yielding less than 2%, your choices are to reduce your lifestyle or accept the permanent need for stocks (and the price variability that comes along with them).

From an administrative perspective, we generally elect to have capital gain and dividend distributions from mutual funds paid into the portfolio as cash (instead of reinvesting). This provides a source of income towards the end of the calendar year that can either be used for planned retirement spending the following year or for rebalancing investments. For clients already retired and withdrawing funds, we try to maintain at least six months of planned distributions in liquid funds so that inopportune liquidations of long term portfolio positions won’t need to occur.

Longer life expectancies necessarily translate into a longer overall retirement time horizon. For a non-smoking couple age 65, there is more than a 50% likelihood that one of the two will be alive beyond age 90. Everyone might have different specific goals, but one common goal is maintain lifestyle throughout retirement until the end of life.

Retirement income planning is not just a math equation, because one side of the equation (how long you will live), is unknown. No amount of planning can change that reality. Our approach is dynamic, folding in actual withdrawals against actual portfolio returns net of inflation. The “Wind Up” phase is fraught with dangers, but we have deep experience in guiding clients through the pitfalls. Ready for a real conversation?

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