Four Steps to Secure Your Retirement Income
Instead of relying on selling stock to fund your retirement, consider these actions to safeguard your retirement income.
Editor’s note: This is part three of a three-part series that takes a look at planning for retirement during the “fragile decade” — the five years before you retire plus the first five years of your retirement. Part one is In Retirement Planning, Consider the Entire Journey. Part two is Goals-Based Retirement Planning Is All About You.
When it comes to withdrawing from your portfolio, many retirees fear that their cash flow might run out before they do. As illustrated in part one of this series, relying on stock sales to meet retirement expenses can be risky, especially during a market downturn early in retirement.
How can we leverage the insights from parts one and two to safeguard our retirement income? Here are four actionable steps to consider.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
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.
Redefine and reframe your principal risk
Price volatility is a popular measure of risk but not a great one for retirement planning. Volatility on its own is simply a probability statistic (and hence why it’s described with technical terms such as alpha, beta, R-squared and the Sharpe ratio).
For our financial planning purposes, volatility needs to be linked with a consequence to provide a practical measure of risk. For example, the fundamental risk in your portfolio is not having the cash available when you need it to meet your spending needs. In measuring your success, your personal monthly spending need is your ultimate yardstick and the only benchmark that matters.
If an adviser says to you (or you tell yourself) that you beat the market last year, your response should be, “Interesting information, but not my primary focus. Much more important, where am I relative to my financial goals, and do I need to course-correct?”
Utilize a goals-based safety-first strategy
With a more practical and fundamental definition of risk, it’s time to let your financial goals guide your planning and investing, not simply your risk tolerance. Match your assets and income with future liabilities and spending.
The premise of our goals-based safety-first strategy is to rely as little as possible on the sale of stocks to cover basic needs, especially when the stock market is falling. Your primary objective during the withdrawal stage is not to maximize investment returns, but rather to meet your spending needs.
Add a margin of safety to your projections
Lower your projected withdrawal rate in your modeling to account for the sequence of returns risk (that is, the risk that you start withdrawing during a bad stretch of market returns). Financial author William Bernstein calculated that a particularly bad sequence of returns can penalize your safe withdrawal amount by about 1.5 to 2 percentage points.
So, for example, if you are projecting a 5% withdrawal rate, consider lowering that estimate to an amount closer to 3% to 3.5% to provide cushion against “bad” market returns in the early years of the withdrawal stage. This may also lead you to conclude that you need to make other course corrections — for example, targeting a larger portfolio balance on your retirement date than you originally assumed. Simply put, plan to spend less and save more.
Maintain a cash reserve
As you approach your retirement date, have a cash cushion. Keep three to five years of spending needs out of the stock market and in cash. Since you hopefully won’t need to sell and withdraw from the equity portion of the portfolio if the market is declining, you avoid the negative compounding effects we saw illustrated in part one. (Remember, compounding works with you during the accumulation stage and against you in the withdrawal stage.) And as the market eventually recovers, you can then sell some of your equity investments to replenish your cash reserve.
Three to five years of cash is my personal comfort zone. What do others say? Author and investor Darrow Kirkpatrick found that the S&P 500 recovers from declines, on average, in about three years. For business cycle declines going back to the 1800s, it’s about five years. Citing research by Wade Pfau, Kirkpatrick notes that worst-case real stock market losses of greater than 50% take, on average, nine years to recover.
Based on Kirkpatrick’s findings, on a worst-case basis, you might consider having upwards of 10 years of spending needs in cash, plus potentially more in other conservative investments.
Take as little risk as you need
The above suggestions are but four considerations as you make personal course corrections to your robust financial plan. My primary message is this: Make sure to reconcile cash withdrawal plans with what your modeling and current market conditions indicate you can support.
In other words, as you plan for the withdrawal stage, don’t take as much risk as you can tolerate; take as little risk as you need.
With a focus on safety first to cover basic spending needs and the right balance of liquidity, the fragile decade can be a lot less frail.
As always, invest often and wisely. Thank you for reading.
This content is for informational purposes only. It is not intended to be, nor should it be construed as, legal, tax, investment, financial or other advice.
Related content
- Risk in Retirement: What’s the Right Level for You?
- Four Historical Patterns in the Markets for Investors to Know
- Risk vs Reward: Understanding This Intricate Investing Dance
- Seven Big Retirement Risks to Avoid
- Taming Risk: Offensive vs Defensive Investing Strategies
-
65 or Older? Cut Your Tax Bill Before the Clock Runs OutThanks to the OBBBA, you may be able to trim your tax bill by as much as $14,000. But you'll need to act soon, as not all of the provisions are permanent.
-
Selling Your Business? Start Planning Two Years in AdvanceWay before selling your business, you can align tax strategy, estate planning, family priorities and investment decisions to create flexibility.
-
We inherited $250K: should we buy a second home or save for college?He wants a vacation home, but she wants a 529 plan for the kids. Who's right? The experts weigh in.
-
65 or Older? Cut Your Tax Bill Before the Clock Runs Out
Thanks to the OBBBA, you may be able to trim your tax bill by as much as $14,000. But you'll need to act soon, as not all of the provisions are permanent.
-
The Key to a Successful Transition When Selling Your Business: Start the Process Sooner Than You Think You Need To
Way before selling your business, you can align tax strategy, estate planning, family priorities and investment decisions to create flexibility.
-
I'm a Financial Adviser: This Is the $300,000 Social Security Decision Many People Get WrongDeciding when to claim Social Security is a complex, high-stakes decision that shouldn't be based on fear or simple break-even math.
-
4 Ways Washington Could Put Your Retirement at Risk (and How to Prepare)Legislative changes, such as shifting tax brackets or altering retirement account rules, could affect your nest egg, so it'd be prudent to prepare. Here's how.
-
2026's Tax Trifecta: The Rural OZ Bonus and Your Month-by-Month Execution CalendarReal estate investors can triple their tax step-up with rural opportunity zones this year. This month-by-month action plan will ensure you meet the deadline.
-
Is Your Retirement Plan Built for 2026 — or Stuck in 2006?It's time to move away from the 4% rule and the 60/40 portfolio to an adaptable, tax-diversified strategy focused on reliable income and longevity.
-
Filed for Social Security Too Soon? 2 Ways to Get a Do-OverIf you've claimed Social Security too soon, two SSA rules allow a do-over. But be warned: Using them clumsily can lead to surprise repayments or lost benefits.
-
Have You Aligned Your Tax Strategy With These 5 OBBBA Changes?Individuals and businesses should work closely with their financial advisers to refine tax strategies this season in light of these five OBBBA changes.
