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Too Much Risk Can Ruin Your Retirement

Insights Retirement Planning

By Matt Stephens, CFP®

Retirement is a significant milestone that many people look forward to for years—and for good reason. It’s an opportunity to step back from the daily grind, enjoy more leisure time, and live life on your own terms. However, in order to make the most of this new chapter, it’s important to have a solid plan in place for creating your retirement income. How will you be able to distribute enough money to live on for 20 to 30+ years in retirement?

This process is dramatically different from the process of contributing to your retirement accounts while you’re working. It requires a new set of considerations and a different approach, both technically and emotionally. Whether you’re just starting to plan for retirement or are already in retirement, this article will provide valuable insights and guidance to help you navigate this exciting new chapter in your life.

Safe Withdrawal Rate Is More Important Than Rate of Return

When it comes to retirement planning, many people focus solely on the rate of return they can expect from their investments. However, what is often overlooked is the amount you will be withdrawing from your retirement fund each year. This is where the concept of a "safe withdrawal rate" comes in. How much can you withdraw from your accounts without running out of money later on in life? 

Based on research done in the 1990s, the most commonly cited safe withdrawal rate is the 4% rule, the idea that you can withdraw 4% of your retirement fund each year, adjusted for inflation, with a high degree of confidence you would not deplete your savings over a 30-year retirement. This concept has been widely accepted for years, but recently one of the pioneers of this research, Bill Bengen, recommended a tweak to it. Instead of 4%, he is now comfortable with a 4.7% withdrawal rate. With our clients, we talk through how this relates to income from their specific portfolios and make sure they're comfortable with the concept. Most end up with a withdrawal rate somewhere between 4% and 5%. We then monitor the income and investment balances and make adjustments as necessary to make sure they're still on the right track. 

It is important to keep in mind that the safe withdrawal rate is just a guideline and should be adjusted according to your personal financial situation. There may be reasons to take out more (if you have a terminal illness, for example) or less (if you're retiring much younger than 65). Nevertheless, when you reach retirement and start taking an income from your portfolio, the amount you withdraw from your investments each year is much more important than the rate of return you receive. 

Diversification Is Key

Diversification is another critical aspect of a successful retirement strategy. While you’re working, it’s common to have an aggressive investment approach (100% stocks, for example) as you're accumulating assets and seeking more growth. But as you approach retirement, it's time to start changing the strategy. The investments that got you here are no longer the best fit. As we saw during the tech bubble in the early 2000s, the Great Recession in 2008, and the first few months of COVID-19 in 2020, the stock market can easily and quickly drop 30% to 50%. 

What if you just retired and now your portfolio is worth half of what it was? 

You aren't adding to your investments anymore, now you're taking money out. Yes, you can (and should) wait for it to recover, but do you have time? If you need income to live on, the last thing you want to do is be forced to sell an investment that has lost so much of its value. Having other types of investments in your portfolio is critical when you need to take income while stocks are temporarily down. 

Think about it. When you're retired and need income, you'll need some for next month, next year, and 10 years from now. One strategy is to match up these income needs with investments that are appropriate for that specific time frame.

For example, you might keep a certain amount in a short term Treasury  money market fund that is easily accessible for expenses coming up very soon. Another amount could be in an intermediate term bond fund that offers a higher yield and has a good chance of holding its value over a five to seven year time frame to be accessed then. Income that you don't need for 10 years or more can stay in the stock market. Yes, those investments will be volatile, but that won't matter since you have other sources of funds while you wait for them to recover. 

Diversification can also level out the highs and lows of investing, which could provide some emotional comfort and confidence to stay invested even when it's not fun.

The Emotional Element of Retirement Withdrawals vs. Working Contributions

Accumulating assets for retirement is often driven by a sense of hope and optimism that you’re working toward a larger life goal and contributing to it with every paycheck. But drawing down your accounts in retirement often brings a completely different emotional experience with more anxiety and a fear of loss. Often, potential losses feel like a bigger deal, since this is the only pile of money you have and you don’t want to be forced to go back to work because it’s fallen too much. 

To help limit this emotional stress, it’s not only important to stay within a safe withdrawal rate range (which can be easier said than done); it’s also critical to have the support of a good financial advisor who can provide the technical guidance you need, as well as emotional support and encouragement to stick with the plan. In collaboration with your financial advisor, you can make informed decisions during periods of market turbulence that will help you stay focused and on the right path.

Do You Have the Right Amount of Risk?

Managing retirement distributions is a complex process that requires careful consideration of both technical and emotional factors. If you’re feeling overwhelmed or unsure about this process, or if you’re unsure you have the right amount of risk, our AdvicePoint team would love to see if we can help. Schedule a 30-minute intro call today.

About Matt

Matt Stephens is a financial advisor with AdvicePoint, a financial services firm based in Wilmington, North Carolina, specializing in retirement income planning, tax-reduction strategies, and charitable planning. Matt spends his days guiding clients as they make the leap from career to retirement. He loves simplifying complex financial issues and giving unbiased answers in plain English. His team goes beyond just professional investment management with their client-focused and high-touch approach, building plans as unique as each client. 

Matt obtained degrees in business administration and communication studies from UNC-Wilmington, holds the Series 66 Investment Advisor and Insurance Licenses, Chartered Retirement Planning CounselorSM, CERTIFIED FINANCIAL PLANNERTM, and Behavioral Financial AdvisorTM certifications, and was a recipient of the 2019 Wealth Management Thrive Award. Outside of work, Matt enjoys spending time with his wife, Brooke, and their two young children. They attend Port City Community Church, where Matt has volunteered since 1999. His favorite pastime is surfing. To learn more about Matt, connect with him on LinkedIn.