In this week’s Tuesday’s Tips, I discuss mismanaging retirement withdrawals and offer some tips to help you avoid this common problem. Please watch the video below to learn more. If you would like a free review of your current financial situation, please use this link to schedule a free call.
An edited transcript follows:
Hi. Phil Weiss of Apprise Wealth Management here with this week’s Tuesday Tips.
This week’s Tuesday Tip discusses mismanaging retirement withdrawals, a common issue for retirees.
Many investors have difficulty switching from saving to spending. Given my experience working as a tax professional and as a financial advisor who works with clients who are close to retirement or retired, I understand that deciding how to generate cash in retirement and how much to spend in retirement can be stressful, complicated, and even confusing. Even those who have accumulated large nest eggs can be guilty of mismanaging retirement withdrawals. This could put their retirement at risk.
The Importance of Life Planning
At Apprise we work with clients on their life plans. I view life planning as financial planning done right. Life planning centers on helping clients identify what matters most to them and living their most fulfilling lives. This in turn allows them to spend their money with purpose by aligning their spending with what is important to them.
In retirement, a key question is how much can you spend on your most fulfilled life? Part of the answer to that comes from knowing how much you can withdraw. Mismanaging retirement withdrawals can further complicate the matter, as it can leave you with less than you need.
Generating cash in retirement requires you to balance a variety of elements, many of which are beyond your control, such as inflation, stock-market volatility, interest-rate trends, and your and your spouse’s expected longevity. After all, none of us know exactly how long we’re going to live.
Managing Your Portfolio
Managing your portfolio too conservatively increases the risk of inflation hampering your purchasing power. If you are too aggressive, you risk losing money. But if you withdraw too much in early retirement you increase your risk of running out of money in your later years. If you are too stingy with your withdrawals, you could be cheating yourself out of enjoyable experiences that your hard-earned money would have allowed you to have. These are difficult and emotionally charged decisions and investors frequently make mistakes or act irrationally.
Given that the stock market’s long-term returns – including dividends – have averaged about 10% per year, some may assume they can withdraw 10% a year for the rest of their lives. Unfortunately, it doesn’t work that way. In fact, it could be a recipe for disaster as the market does not move in a straight line.
For example, if the market falls 20% – also known as a bear market – you would need a 39% gain for your portfolio to return to its initial value. A couple of years of large withdrawals during down markets could put you in a very bad position, and you could find it impossible to recover from it.
(As an aside, please note that the more commonly used withdrawal strategies refer to the 4% rule. This withdrawal rate is adjusted for inflation. Please contact us if you would like to discuss this topic further.)
Another Example of Mismanaging Retirement Withdrawals
We also see the opposite mistake. Some investors withdraw too little because they’re afraid to touch their principal. It is perfectly fine to reduce your principal provided you have a large enough nest egg to last your entire life.
The other reason to touch your principal is that your investment goals don’t require it. Perhaps you don’t want to leave money to any person or organization. You might simply want to enjoy life a bit more. Like so many things, it’s important to know yourself and your goals. That can help you find a balance between what feels right and protecting the downside if things don’t go as planned.
While rules of thumb don’t take into account your unique situation, most people should plan on withdrawing no more than 3%-5% of their portfolio annually.
The Importance of Strategic Planning
Strategically planning your withdrawals can be complicated. That’s why we offer our clients advice and tactics to help them make prudent, tax-savvy withdrawals as well as provide guidance on how to configure their accounts from a tax perspective. (For example, see links to recent blogs I wrote on the subject in the video transcript on Apprise’s website here and here.) This can also help increase your peace of mind.
If you are concerned about mismanaging retirement withdrawals, please schedule a free call. We would be happy to review your situation.
I hope you find this week’s Tuesday tips helpful. I will be back next week with Apprise’s five favorite reads of the week. Have a great day.
Our practice continues to benefit from referrals from our clients and friends. Thank you for your trust and confidence.
We hope you find the above post valuable. If you would like to talk to us about financial topics including your investments, creating a financial plan, saving for college, or saving for retirement, please complete our contact form. If you do, we would be happy to have a conversation. You can also schedule a call or a virtual meeting via Zoom.
Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.