I’ve finally embarked on writing this 7-part blog series, based on an interview I gave recently detailing the common mistakes I see people make with retirement planning.
Thanks for taking the time to read it! I hope you find it helpful. The 7 Deadly Sins are:
- No Holistic Plan
- No Spend Down Strategy or Exit Plan
- Too Focused On “Growth” Rather Than “Income”
- No Volatility Buffer / Non-Correlated Asset Classes
- Not Risk Smart
- Mistakes with Insurance
- No Strategy for Taxes
Today I will share my thoughts on Part 2: No Spend Down Strategy or Exit Plan.
Today, let us talk about the 2nd of the 7 Deadly Sins in Retirement Planning.
In my last blog, I discussed the importance of having a holistic plan and beginning with the end in mind.
When people begin accumulating money in their 401k or IRA, they most often do so with no understanding of how the distributions work, either from a risk or taxation standpoint.
Instead of beginning with the end in mind (a goal of 
how much retirement income they want, and then planning and utilizing the proper products to get there) the average Joe just begins stuffing as much money as he can afford into his employer-sponsored retirement plan.
Fast forward 35 years. I find that pre-retirees know how much money they have… they just are not sure what to expect from that money.
A 2008 study by MetLife showed that nearly ½ of all Baby Boomers surveyed thought that you could safely withdraw 10% from your retirement portfolio every year in retirement.1
Well, you could… but you would just run out of money REAL FAST.
So, what is that safe withdrawal rate from a managed money portfolio?
5%? Nope too much.
4%? Even 4% fails 20-30% percent of the time now.
So, what is the bulletproof safe withdrawal rate?
According to the Wall Street Journal, it is just 2.2%. 2.2%!
Although 3% is generally considered “safe”.
Since the 1990s, financial advisors have been promoting the “4% rule”. This is based on research done by William Bengen in the 1990s, and the Trinity Study.2
Their findings led to “conventional wisdom” of retirees should invest their portfolio in 60% stocks / 40% bonds, and 4% withdrawals per year.
This basic assumption is what most Monte Carlo Simulations were based on….
But those old rules no longer fit our new reality of this millennium.
Those studies were done pre – 2000, so pre dot com crash, pre 9/11, pre-financial crisis, the pre-mortgage meltdown, and before the Federal Reserve decided that it would be just a GREAT idea to artificially keep interest rates near 0% for over a decade.
So nowadays, if someone is withdrawing 4% from their portfolio, there is a 20-30% chance that they will run out of money before they die!
I was recently reading a study by Morningstar that said if someone retired at the wrong time, and they took a 25% loss in their 1st year – there would be a 59% chance that they would run out of money before they died. They would never be able to make up for that loss.3
It is called Sequence of Returns risk, and it is absolutely devastating for a retiree drawing income out of their portfolio.
I have said it before, but it bears repeating: Imagine being a “millionaire” but having to pace yourself by living on $30,000 from your investments!
Is that the optimal way to structure your retirement life?! I would argue NO.
A comprehensive retirement income plan is a much more advantageous strategy. I will describe two that I find to be very valuable.
The 1st strategy is called the flooring strategy in some circles. This strategy aims to cover all basic expenses with guaranteed lifetime income sources.
In an optimal situation, where enough resources are available, we utilize guaranteed lifetime income sources to cover discretionary/recreational spending as well!
Retirement expert Tom Hegna refers to this concept as “Paychecks & Playchecks.”
Social security is an important tool for this strategy, as is a defined benefit pension plan, if available.
Any shortfall for the immediate income needs is funded with a non-correlated asset class to distribute regular income.
Depending on the situation, I like cash value life insurance or an income annuity.
With the remaining assets, they can be invested for long-term growth potential and to offset the effects of inflation.
Retirement expert Curtis Cloke refers to this approach as “buy income & invest the difference.”
A second strategy is referred to 
as the “Bucket Plan.”
This strategy divides retirement assets into 3 buckets: a “now bucket” for an emergency fund, planned expenses, and up to 1 year of income.
The “short term bucket” involves protecting and preserving 8-10 years of income in a low-to-no risk vehicle to optimize short term income goals.
This can range from bond ladders to fixed indexed annuities, and I have even heard of people utilizing preferred stock in this bucket.
The third and final bucket is the “long term bucket” which is investable assets designed for 10+ years away.
Due to the long-time horizon, this portion of money can be invested with a focus on growth.
About 5 years before the short-term bucket is exhausted, we peel off some of the profits from the long-term investments and refill the short-term bucket for the next round of short-term spending.
The creator of the “Bucket Plan Philosophy” Jason Smith refers to this methodology as “buying a time horizon & investing the difference.”
The beauty of both of these strategies is that once the immediate income needs are met, the remaining investable assets can be positioned even more aggressively for growth if desired (depending on the individual investor’s goals, time horizon, risk tolerance, etc.)
Because the short-term spending goals are covered, near-term volatility is not a significant disruption to the investment plan since these investments will not be needed in the short term.
This helps the investor retire with confidence, and stick to the long-term nature of the plan.
He or she will not be tempted to bail out and sell due to short term market volatility.
This strategy can lead to immediate gratification due to available income, a higher rate of return on the long-term investments, and overall improved outcomes & happiness!
There you have it, folks.
I have briefly laid out a couple of methodologies that will generally perform much better than retiring on an IRA in a managed money account and taking distributions of 3% each year.
These methodologies can provide more after-tax, spendable income, with less volatility and worry, more predictability and certainty, while still growing a portion of your money for future spending goals, or even for leaving a legacy.
The earlier that one begins planning, the more advantageous it is.
Contact me to learn more, and do not forget to tune in for the next entry of the series – Deadly Sin #3: Being Too Focused on Growth, Rather than Income.
P.S. If you haven’t checked it out yet, please stop by my mini online seminar How Retirees and Pre-Retirees Can Potentially Avoid Going Broke While Keeping Their Nest-Egg Secure! Tons of great information and bonus is it is 100% COMPLIMENTARY!
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