By Chris Heisten, CRPC®, CFP®, CSRIC®
Retirement is a big moment in life many people eagerly anticipate—and for good reason. It’s a chance to take a break from daily work, have more free time, and live life your way. However, to make the most of this new phase, you’ll need a solid plan for your retirement income. How will you manage and withdraw your money to support yourself for 20 to 30 years in retirement?
The process of distribution is not the same as saving for retirement while you’re working. It involves different considerations and needs a new approach, both technically and emotionally. Whether you’re just starting to think about retirement or already there, this article offers helpful insights and advice to guide you through this exciting chapter in your life.
Safe Withdrawal Rate Is More Important Than Rate of Return
When it comes to retirement planning, many people focus solely on the rate of return they can expect from their investments. However, what is often overlooked is the amount you will be withdrawing from your retirement fund each year. This is where the concept of a safe withdrawal rate comes in. How much can you withdraw from your accounts without risking running out of money later on in life?
The most commonly cited safe withdrawal rate is the 4% rule, which is the theory about how much money you can safely withdraw from your retirement accounts each year without running out of money. The 4% rule became widely publicized after Bill Bengen’s research in 1994, which showed that withdrawing up to 4% of retirement assets, and then adjusting annually for inflation, could sustain the typical 30-year retirement going all the way back to 1926.
On the surface, it may seem like withdrawing 4% is definitely the way to go. After all, the data goes back nearly 100 years! But it is important to keep in mind that the safe withdrawal rate is just a guideline and should be adjusted according to your personal financial situation and goals. Nevertheless, when you reach retirement and start taking an income from your portfolio, the amount you withdraw from your retirement fund each year should be more important than the rate of return you receive.
Diversification Is Key
Diversification is a critical aspect of a successful retirement strategy. When you’re working, it’s common for people to have a fairly aggressive investment approach with 100% stocks as they’re accumulating assets and seeking more growth. But when you reach retirement, you shouldn’t keep the same investments you’ve had the last few decades. As we saw during the tech bubble in the early 2000s, the Great Recession in 2007-2009, and the first few months of COVID-19 in 2020, the stock market can drop 30% to 50%, and sometimes it can do that quickly.
What would your income in retirement look like if you were dependent on a portfolio that was 100% in stocks?
Situations like those are why we want to have diversification in your investment portfolio. We want to have other assets, besides stocks, that don’t fall nearly as much in a downturn, so that if you need income, we can generate it from those assets while we wait for your stock portfolio to recover.
In addition, this diversification can level out the highs and lows of investment, hopefully giving you more comfort and confidence in your investment and income strategy.
The Emotional Element of Retirement Withdrawals vs. Contributions While Working
Accumulating assets for retirement is often driven by a sense of hope and optimism that you’re working toward a great goal and contributing to it every two weeks. But drawing down your accounts in retirement often brings a completely different emotional experience with heightened anxiety and a fear of loss. In addition, any potential losses feel like a bigger deal, since this is the only pot of money you have, and you don’t want to be forced to go back to work because it’s fallen too much.
To mitigate this emotional stress and avoid any mistakes, it’s not only important to stay within a safe withdrawal rate range (which can be easier said than done); it’s also critical to have the support of a good financial advisor who can provide the technical guidance you need, as well as emotional support and encouragement to stick with the plan. In collaboration with your financial advisor, you can make informed decisions during periods of market turbulence that will help you stay focused on your financial goals.
We Are Here to Help
Managing retirement distributions is a detailed process that involves thinking about both technical and emotional aspects. Are you feeling stressed or uncertain about the choices you need to make? Or unsure if you’re taking the right amount of risk? The Heisten Financial team is here to assist! Partner with us to establish a customized financial strategy by emailing email@example.com or calling 907.222.6270 to get started. We look forward to hearing from you!
Chris Heisten is President and Founder of Heisten Financial LLC, a fee-based boutique financial planning firm with the focus of giving clients back their time so they can spend it doing what’s most important to them. Acting as a true fiduciary for his clients, Chris aims to solve their financial pain points and move them toward financial freedom. In the financial industry since 2007, Chris partners with business owners and oil workers on their journey through life, striving to instill calmness and a sense of direction as he simplifies the complex. He loves nothing more than seeing clients experience relief when they achieve what they thought was impossible.
Chris graduated from the University of Maine, where he played hockey on a scholarship, and retired from professional hockey in 2007. In the community, he remains engaged serving as a youth hockey coach. Chris holds the CERTIFIED FINANCIAL PLANNER™, Chartered Retirement Planning Counselor℠, and Chartered SRI Counselor™ designations. Outside of the office, he enjoys trying new food and wine, reading, traveling, playing golf and hockey, fat tire biking, and donating to local charities. His passions include being a husband and dad, lake life with the family, watching his son and daughter play sports, and spending time with his wife. To learn more about Chris, connect with him on LinkedIn.