Do This 2 Years Out
If you’re like a lot of our clients, you are trying to achieve a 10 out of 10 confidence level about your ability to retire – anything less than that isn’t ideal, right? Well, if that’s true, then you can’t ignore this one important piece of your retirement plan: your retirement income withdrawal strategy.
Consider this hypothetical situation:
Let’s go back to January 1, 2022, and let’s assume you were targeting a retirement date of January 1, 2024 – just two years out. If you were starting to think about retirement at the beginning of 2022, but were still a couple of years away, then it’s not uncommon for you to have a fairly aggressive investment allocation in your 401(k). Sometimes we see clients that have 80% or sometimes even more of those dollars in stock-based funds. If that were the case for you at the start of 2022, then the last 16 months or so would have been pretty scary for you. You would have seen that account balance drop pretty aggressively as you grew closer to your retirement date, and maybe you’d be starting to wonder if you’re actually still going to be okay to retire.
One thing is for sure: if this is reflective of your experience over the last year or so, you’re likely not at a 10 out of 10 confidence level about your ability to retire. You’re now stuck hoping and praying that the market recovers within the next year or you may not be able to retire on your originally intended timeline.
What can we learn from this hypothetical example? We need to have a retirement income withdrawal strategy.
Create an Income Plan
The first step in creating your retirement income withdrawal strategy is to define how much retirement income you’ll actually want or need. We find it’s easiest to think of this income in a monthly dollar amount by asking a simple question: how much income do you need or want on a monthly basis in retirement?
Make sure you think about expenses that you may not have today like additional medical expenses, travel, dining out, playing more golf, and anything that you hope to be able to do more of when you’re not working full time.
Once you have that plan set, you can actually define what you need in retirement, and how much risk you need – or don’t need – to take in order to accomplish that goal.
Build a Conservative Bucket
Now that you have your income plan, it’s wise to consider putting a few years – maybe even 4-5 years – of the annual income needed in a conservative investment “bucket.” For example, if you decided you needed $5,000/month of income in retirement, then that is $60,000 annually. That means you would want about $300,000 ($60,000 x 5 Years) in your conservative bucket. You should talk with a financial advisor, preferably a Certified Financial Planner™ (CFP®) with retirement planning experience, to determine that exact strategy.
Think back to the above hypothetical situation. If you had invested the equivalent of a few years of retirement income in a conservative investment bucket, you would have had a lot less of your dollars exposed to the market crash we’ve recently experienced, and therefore feel a lot more confident about still retiring by your original targeted date.
Now, that can work for a lot of people, but sometimes it doesn’t.
Build Your Overall Investment Strategy
With that conservative “bucket” of money now in place, you can begin to think about how to invest the rest of your assets. A common best practice is to think about creating two more buckets of money – a moderate one and an aggressive one. In order to determine how much to put in each, you want to go back to that Income Plan and decide what you need. The reality is that if you’ve saved well and you don’t need a tremendous amount of retirement income, you likely don’t need to take on much risk to achieve your goals, and can likely increase your overall retirement confidence level just by investing a bit more conservatively.
If you’re playing a little bit of catch-up or need a higher income in retirement, then you may need to take a little more risk than others. To know the answer to this, you really need to meet with a professional that can run the numbers on your plan, but to get you started, you can also use our favorite retirement planning software.
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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.