The novel coronavirus abruptly ended the longest bull market in US stock market history.\u00a0 As we write this in spring of 2020, the broad stock market indices are down about 25% from the peak reached just a few weeks ago.\u00a0 If you are retired or approaching retirement, you are probably concerned about how this global pandemic will affect you. Now might be a good time to review your portfolio in the broader context of your retirement plan.\u00a0 You may decide to make some adjustments to ensure that you are still on track for a secure retirement.<\/p>\n
While you might be understandably anxious about how much value your investments have lost, the real issue is whether or not your financial plan for the future still works.\u00a0 If it does, you can relax. Your investments will eventually recover. If it does not, you can take corrective action to get back on track for a secure retirement.<\/p>\n
A financial plan for retirement has several important elements.\u00a0 You need to know how much you will spend in retirement. People often struggle to come up with a budget for retirement, particularly if they are still years away from retiring.\u00a0 The easiest way to figure out what you will spend in the future is to consider what you are spending currently and then imagine you are retired today and think about how the numbers will be different.\u00a0 For example, you might spend less money on commuting and clothes for work, but more money on gardening and travel.<\/p>\n
Also, separate your spending into fixed and variable expenses.\u00a0 Fixed expenses are permanent (e.g. utilities, property taxes, insurance, food, etc.) and will not vary significantly. \u00a0 Variable expenses change for various reasons (e.g. replacement vehicles, child\u2019s wedding, a big remodel, travel, etc.). \u00a0 Make sure to account for inflation (particularly for health care which will likely be higher), as your expenses will go up over time and threaten a secure retirement.<\/p>\n
Now consider your income sources.\u00a0 You will likely have Social Security<\/strong><\/a><\/span> and you should generally plan to take it as late as possible (i.e. age 70).\u00a0 You may also have a defined benefit pension plan, rental property income, part time work, etc. You can also take distributions from your investments in retirement accounts (e.g. 401(k), 403(b), IRA, Roth IRA) and non-retirement (i.e. taxable) accounts.<\/p>\n The goal is to have your income sources be large enough to cover your spending for as long as you live.\u00a0 If you plan to retire at 65, you should plan on 20-30 years in retirement, perhaps longer if you are healthy, eat well, exercise, and you have a family history of longevity.<\/p>\n Now let\u2019s turn our attention back to your portfolio.\u00a0 What role will it play in your secure retirement<\/a><\/strong><\/span>? Are you going to receive enough income from a pension, Social Security, and perhaps other sources, so that you will not need to rely on taking distributions from your portfolio?\u00a0 Or are you, like most Americans, not going to have a pension and will you, as a result, have to rely heavily on your portfolio to augment Social Security?<\/p>\n The answer to that question will greatly influence the way your portfolio should be constructed for a secure retirement.\u00a0 Let\u2019s assume that your portfolio will play a large role in creating income, so that you can enjoy a secure retirement. We next need to relate the size of your portfolio to the amount of income you will need to take from it.<\/p>\n <\/p>\n Let\u2019s say that you have $2.0 million in retirement accounts and $500,000 in a brokerage account as you enter retirement and that you need a total of $75,000 in income.\u00a0 If Social Security will provide $35,000, then you need to take $45,000 from your portfolio. You will be taking 1.8% from your portfolio ($2.5M\/$45,000). That is considered, by financial planners, to be a very conservative rate of withdrawal.\u00a0 So, a conservative portfolio (i.e. minimum exposure to the stock market) will support that distribution rate.<\/p>\n What if you need $150,000 in income and your Social Security income will be $40,000?\u00a0 That means you need to take $110,000 from your portfolio. In that case, you will be taking 4.4% from your portfolio ($2.5M\/$70,000).\u00a0 That is a far more aggressive distribution rate, and it exceeds the generally-accepted sustainable rate of 4%. In that case, you will need to accept a fairly aggressive portfolio (i.e. significant exposure to the stock market) to support your distributions.<\/p>\n The extent to which you need to take distributions from your portfolio will determine your need to take investment risk to ensure a secure retirement.\u00a0 The less reliant you are on your portfolio, the more conservative can be your portfolio.<\/p>\nYour Portfolio in Retirement<\/b><\/h2>\n
Want to learn more about retirement planning? Contact our team at Springwater Wealth today to learn how we can help you develop a plan for your financial future.<\/a><\/strong><\/span><\/h2>\n
Your Financial Need to Take Risk<\/b><\/h2>\n
Your Willingness to Take Risk<\/b><\/h2>\n