Retirement is the goal. For many of us it is the dream. However, there can be complications. We work so hard for so many years to build up a lump sum of investments, but then once we reach retirement age there are many different approaches through which we can deploy that lump sum. In fact, distributing funds from a retirement account is actually much more complicated than contributing funds to a retirement account; hence, it can become very confusing.
Together, the goal then becomes lessening the complication factors. You may have heard of the Bucket Method - this is where you break up amounts according to timeframes or risk tolerances; the Safe Withdrawal Rate - where you take a specific percentage of your portfolio (typically 4%) on the first day of your retirement and spend that same dollar amount every year adjusted for inflation; the Percentage Rule - where you spend a fixed percentage of your portfolio value no matter what the market is doing resulting in vastly different dollar amounts from year to year; or even using the IRS table of Required Minimum Distributions from tax-deferred retirement accounts to calculate how much to withdraw from all retirement accounts. All these methods have their strengths and weaknesses depending on your needs, situation, goals, and preferences. However, there is another method that seems to better account for your specific situation more than a blanket rule. And, while it requires more work to develop and implement, it merits consideration.
The framework we want to dive into with you was developed by the popular retirement researcher Wade Pfau, CFA and breaks retirement into four different needs. In order of importance: the first is the need for what he refers to as “Longevity Goals” which are basically all of the expenditures necessary for you to survive for the rest of your life (food, shelter, health care, utilities, etc.). The second, “Liquidity Goals,” are about maintaining some portion of your portfolio in cash to be quickly accessed for unexpected needs outside of other goals or needs. The third, “Lifestyle Goals,” account for all spending above and beyond the Longevity goals such as travel, higher standards of living, helping family, friends or charities, self-improvement, hobbies, etc. - all of the expenses that can be turned off if necessary. Finally, “Legacy Goals,” account for any assets you’d like to leave to heirs, charities or other causes after you pass away. The interesting thing about Legacy Goals is that only about 50 years ago the idea of generational wealth and leaving an inheritance was a relatively foreign concept. Parents might die with a home and some money in the bank, but it wasn’t until recently that many people began to plan to leave significant assets to their children (the benefit of which is vehemently debated, however, we’ll leave that discussion for another day).
What is so powerful about this framework is how customizable it is for each client’s situation. Additionally, you can creatively employ different financial tools to meet the various categories of retirement needs. In a very simplified example, keeping a significant amount in a liquid emergency account can provide for your liquidity goal, a specific type of Single Premium Immediate Annuity (virtually the only annuity product we will ever recommend to a client and only in specific situations) for the majority (if not all) of the Longevity Goal, and an allocation of equities and bonds (with very little need for additional cash due to our Liquidity Goal) to account for the Lifestyle and Legacy goals.
Although much of what we do with clients pertains to how to grow and accumulate assets for retirement, there is still value in looking forward at how those funds will eventually be employed. Hopefully this has given you some options to consider and keep learning!