By Jay Shareef and Chris Rhoads
After years of hard work and dedication, it’s finally time to step away from the daily grind and embrace a life of your choosing. However, to truly relish this new chapter, a well-thought-out plan for creating a sustainable retirement income is essential. After all, providing for the next 20 to 30 years in retirement requires careful consideration and a different approach than when you saved during your working years.
Whether you’re just beginning to explore retirement planning or have already embarked on this exciting journey, you want to feel confident it will be a financially stable and emotionally fulfilling season of life. To that end, it’s good to prioritize understanding the importance of safe withdrawals, diversification, and risk.
Let’s dive in.
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 risking running out of money later on in life?
The most commonly cited safe withdrawal rate is the 4% rule, which is the theory about how much money you can safely withdraw from your retirement accounts each year without running out of money. The 4% rule became widely publicized after Bill Bengen’s research in 1994, which showed that withdrawing up to 4% of retirement assets, and then adjusting annually for inflation, could sustain the typical 30-year retirement going all the way back to 1926.
On the surface, it may seem like withdrawing 4% is definitely the way to go. After all, the data goes back nearly 100 years! But 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 and goals. Nevertheless, when you reach retirement and start taking an income from your portfolio, the amount you withdraw from your retirement fund each year should be more important than the rate of return you receive.
Diversification is a critical aspect of a successful retirement strategy. When you’re working, it’s common for people to have a fairly aggressive investment approach with 100% stocks as they’re accumulating assets and seeking more growth. But when you reach retirement, you shouldn’t keep the same investments you’ve had the last few decades. As we saw during the tech bubble in the early 2000s, the Great Recession in 2007-2009, and the first few months of COVID-19 in 2020, the stock market can drop 30% to 50%, and sometimes it can do that quickly.
What would your income in retirement look like if you were dependent on a portfolio that was 100% in stocks?
Situations like those are why we want to have diversification in your investment portfolio. We want to have other assets, besides stocks, that don’t fall nearly as much in a downturn, so that if you need income, we can generate it from those assets while we wait for your stock portfolio to recover.
In addition, this diversification can level out the highs and lows of investment, hopefully giving you more comfort and confidence in your investment and income strategy.
Accumulating assets for retirement is often driven by a sense of hope and optimism that you’re working toward a great goal and contributing to it every two weeks. But drawing down your accounts in retirement often brings a completely different emotional experience with heightened anxiety and a fear of loss. In addition, any potential losses feel like a bigger deal, since this is the only pot of money you have, and you don’t want to be forced to go back to work because it’s fallen too much.
To mitigate 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 on your financial goals.
Managing retirement distributions is a complex process that requires careful consideration of both technical and emotional factors. No matter where you are on your retirement journey, it’s never too early or too late to take control of your financial future. If you don’t already have an advisor helping you with these kinds of decisions, our WealthFlow Financial team would be happy to help. Reach out to us at (301) 798-5250 or schedule a phone call now.
Jay Shareef is vice president, financial advisor, federal benefits consultant, and co-founder at WealthFlow Financial. As a U.S. Army veteran, Jay is passionate about helping federal employees create a bulletproof plan for retirement and navigate the often confusing and complicated federal benefits landscape. He spends his days educating and providing clients with unbiased insurance benefits and retirement strategies to help his clients create guaranteed income for life. As a problem-solver and trustworthy resource, Jay always puts his clients and their needs first so they can find financial peace of mind. To learn more about Jay, connect with him on LinkedIn.
Chris Rhoads is a co-founder and vice president of WealthFlow Financial. As a registered investment advisor and independent financial professional, Chris is committed to helping his clients in retirement and he takes a holistic approach to financial planning that includes insurance and risk management, investments and wealth management, retirement income planning, and estate and tax planning. Chris has been married to his wife, Tia, since 2009 and they live in Frederick, MD, together with their two young daughters. In his free time, Chris enjoys traveling, watching sports, and being active in causes about which he cares passionately. To learn more about Chris, connect with him on LinkedIn.