Many (hopefully) happy returns: How will your finances fare post-retirement?
Q: Should I care what my returns are during the next few years?
A: It depends. Are you age 30 or 60? Will you need distributions soon? In general, the greatest threat to a retirement and income generating plan is during the five to seven years — before and after — retirement. Especially if the investments include equities, real estate and commodities that have varied returns over time.
When you’re approaching retirement, a large drop in investment values may cause great stress on a financial plan, especially if it includes paychecks.
Average rates of return aren’t very comforting when a portfolio declines 50%, like it did during the bear market of 2007-2009.
Now, this “sequence” of returns risk can be mitigated with CDs and Treasuries. Interest rates have returned to the 5% range, and these bonds may be laddered over the first five years and earmarked for annual income as they mature. This potentially allows the rest of the portfolio to be invested in diversified, long-term ETFs and funds that will provide the higher returns that growth and value equities provide, dependent on risk profile.
During retirement, non-discretionary living expenses still must be covered and investments sold. Going back to work is not a popular suggestion.
Sometimes taking the Social Security benefit of the lower earner can allow a lesser monthly distribution from the affected portfolio.
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During market downturns the fixed amount of the withdrawal is a higher percentage of the portfolio. As the value decreases, the recovery time is extended. This greatly reduces the safe withdrawal rate.
Although fixed annuities have been offered as a solution, the guaranteed income stream does not offer the flexibility that “living the good life” needs. We know that go-go years are for the healthy, and this is when we want to travel and spend. Risks during later years may be covered with long-term care plans and/or selling the big house. Liquidity is usually preferred.
Variable annuities are not tax friendly because they turn long-term capital gains into ordinary income. They also come with high fees, expensive riders, early withdrawal penalties and surrender charges. The death benefit typically guarantees that the beneficiary will get a death benefit that will be at least equal to the amount of the purchase payment. Where does that help the paycheck?
Update your plan now that fixed income options are more attractive. Discuss with your advisor about creating a ladder of CDs and Treasuries that can buy you peace of mind as you unchain from your employment world and venture out to discover new, fun life experiences. Also check in with your tax advisor; these bonds earn interest, and payments will be taxed as ordinary income.
It’s true: There is no free lunch.
Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or mbaldwin@buckinghamgroup.com.
For informational and educational purposes only. Individuals should speak with a qualified financial professional based on their own circumstances to determine if the above is appropriate. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth® R-23-6608
This article originally appeared on Florida Today: Seeking many happy financial returns? Know there's no free lunch
