With average life expectancy in the U.S. close to 80 years, retirement is far from a finish line. It’s just another new phase in life—much like the transition from young, dependent college student to independent, working adult. But with people today living 30+ years in retirement, generating enough income from your assets can be tricky. You need new ideas to help make sure your money lasts.
Back when retirements were typically shorter, the traditional approach of gradually getting more conservative with your investments (shifting from equities to fixed income) as the day approached made sense. It helped to reduce investment risk at a critical time where you might not have enough working years left to recover from a market downturn.
Now, however, looking at a possible 30-year retirement, it doesn’t make sense to have longer-term assets (those that are earmarked for generating income 10 or 20 years down the road, or are intended as legacy assets for your family) to be invested the same way as assets you’ll be relying on for income during the early years of retirement.
Transitioning from saving to spending
Before you transition into retirement, it’s critical to have a firm understanding of your:
- Guaranteed income sources including Social Security, pensions and annuities;Disclosure 1
- Non-guaranteed income sources such as your tax-deferred retirement savings, taxable accounts and CDs; and
- Estimated income need to cover essential expenses (food, shelter and healthcare) as well as other important expenses—things like travel, charitable gifts and a legacy for your heirs.
Ideally, guaranteed income sources can be aligned to all of your needs and maybe even some of your wants. This will allow your portfolio assets to be invested less for short-term income and more toward long-term growth. You can also afford to be more invested for growth with any assets that won’t be needed for a decade or more.
Your advisor can help—both prior to and early on in retirement—working with you to define and quantify your retirement and legacy goals. Together, you can designate income sources and structure your investments to help reach your goals with an appropriate level of investment risk.
Strategies for aligning income to goals
At Truist Wealth, we believe that an optimal income strategy is built around three core principles—bucketing, total return and dynamic distribution. The right approach (or mix of approaches) will depend on your particular needs, preferences and circumstances.
Bucketing: segments your retirement assets by categories. The two most common bucketing approaches are goals-based (aligning specific income sources to your needs, wants and wishes) and time/risk-based (where assets intended to provide short-term income are invested conservatively, while assets earmarked for longer-term income are invested more aggressively).
Total return approach: in a low-interest-rate environment, it can be hard to generate enough income from interest and dividends to sustain your lifestyle. A total return approach seeks balance both yield and price appreciation (given a particular level of risk) to give you more portfolio diversification, enhance tax efficiency and generate income for a longer lifetime.
Dynamic distribution: a traditional systematic withdrawal approach distributes a fixed dollar amount or a fixed percentage from your portfolio each year. A dynamic distribution approach, however, looks to maximize portfolio returns and growth by distributing more income when market returns are high and less income when returns are lower.
In addition to market risk and longevity risk, new retirees need to factor in inflation risk (especially the escalating costs of healthcare) and the risk of withdrawing too much too soon. Another important factor is something called sequence of returns risk, which teaches us that negative market returns during the first few critical years of retirement can have a major impact on the ability of our portfolios to last a lifetime.
Don’t wait to sit down with your advisor to develop a thoughtful income strategy that will help meet your current needs, be flexible enough to adapt as circumstances change, and be built to endure. Using our collaborative financial planning platform, together we’ll craft a retirement income solution that helps to address your needs today while providing greater confidence in your plan for years to come.