People planning to retire often tell me their greatest fear is running out of money after they stop working. They have a valid concern, but the risk is not really about living too long.
Instead, the issue that could bring calamity is the risk of failing to consistently follow a reasonable retirement plan.
Keep on Track
After people create their retirement plans, the tough part for many is staying the course. That's true particularly when investment returns are volatile and negative. The natural reaction to that kind of market environment is to cut and run. But studies show that investors lose 1% or more on their returns when they are not in the market. This could mean five or more years in lost income.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
However, unlike the risk of market returns, which no amount of diversification can fully allay, you can control the “stay the course” risk. All it takes is a little adjustment in your retirement planning, based on a simple premise: Reduce the amount of your income that is subject to the market — or what we call "income volatility."
With preparation, you can reduce your income volatility during retirement by 50% or more. And, with the proper investment, you can get a 20% increase in income that lasts a lifetime.
You can achieve these results with an income allocation plan.
How Income Allocation Works
As I have written previously, income allocation's twin goals are to increase the amount of after-tax (spendable) income and to reduce income volatility (for more dependability).
Here’s an example for two new retirees age 70, and how income allocation compares with a traditional asset allocation plan in which all income comes from withdrawals from savings:
Investor A follows an asset allocation withdrawal strategy and invests 50% in the stock market and 50% in bonds. Her withdrawals are set to last for 25 years, assuming a blended long-term market return of 4.5%.
Investor B follows an income allocation strategy, using both withdrawals from savings and guaranteed lifetime income from income annuities. Some of her savings are used to purchase an immediate annuity with income starting at 70. She also uses a portion to buy deferred income starting at age 85. The balance is invested in a managed portfolio of stocks, bonds and cash, with withdrawals set to last for 15 years.
Unfortunately, soon after the start of the plan, a market meltdown occurs, just like in 2008-09. Investor A, with all her savings in an investment account with no guaranteed income, loses $180,000 in account value. Investor B loses $90,000, but still receives guaranteed income from her immediate annuity. She also has the peace of mind of knowing that income after age 85 is guaranteed for life. Further, Investor B has a managed withdrawal program that takes some of current year’s withdrawals from the cash account. (I am preparing a study on managed withdrawal strategies and will post it soon.)
Who is more likely to stay the course?
Investor B is not happy with the market machinations, but her income allocation plan reduced her income risk, so she sticks with her plan. Investor A is more likely to change course. She might sell during the downturn in hopes of stanching the losses, or she might reduce withdrawals — and her lifestyle — going forward.
Even the most expert adviser can’t protect against volatile markets. But when you consider all possible outcomes and create an income allocation plan as you prepare for retirement, you will be able to weather troubled times in the markets with confidence.
-
3M, GM, Blue Chips Lead to the Upside: Stock Market TodayThe S&P 500 followed the Dow Jones Industrial Average into green territory, but the Nasdaq lagged the other indexes because of its tech exposure.
-
Social Security Payment Schedule for 2026Find out when you can expect your 2026 Social Security payments and the date you get paid when your scheduled day falls on a holiday.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
-
Supermarkets Have Become a Pickpockets' Paradise: How to Avoid Falling VictimSome stores regularly rearrange inventory with the aim of increasing purchases, and they're creating opportunities for thieves to steal from customers.
-
I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement AccountsWhile alternatives offer diversification and higher potential returns, including them in your workplace retirement plan would require careful consideration.
-
I'm a Financial Planner: If You're Within 10 Years of Retiring, Do This TodayDon't want to run out of money in retirement? You need a retirement plan that accounts for income, market risk, taxes and more. Don't regret putting it off.
-
Five Keys to Retirement Happiness That Have Nothing to Do With MoneyConsider how your housing needs will change, what you'll do with your time, maintaining social connections and keeping mentally and physically fit.
-
Budget Hacks Won't Cut It: These Five Strategies From a Financial Planner Can Help Build Significant WealthCutting out your daily latte might make you feel virtuous, but tracking pennies won't pay off. Here are some strategies that can actually build wealth.
-
To Unwrap a Budget-Friendly Holiday, Consider These Smart Moves From a Financial ProfessionalYou can avoid a 'holiday hangover' of debt by setting a realistic budget, making a detailed list, considering alternative gifts, starting to save now and more.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track RecordHomeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
