Retirement Game Plan

I had a conversation Monday with someone in her early 50s that was hesitant to invest in the stock market. She is single with no dependents and was planning to retire in about ten years. She was worried her money wouldn’t be there when she retired if she invested in the stock market. The following is part of my discussion with her.

She planned to use her investments as a base to draw against until she reached age 70, at which time she could start receiving her Social Security benefits with the 30% higher amount because she waited. Then, at age 72, she could start her required minimum distributions from her 401k. She was actually in very good shape but did not feel so. Her “portfolio” was growing with her annual 401k contributions (and that was fully in the stock market), some additions to savings from her paycheck, the compounding of the dividends and interest from her investments which will be remaining in her portfolio and the expected growth of her eventual Social Security benefits. The investments in her own name were not in the stock market and, until recently, were earning very little.

After we reviewed her situation, it appeared that her plans would be better firmed up with some added funds in the stock market. While she understood that strategy, she still expressed some uneasiness. “Suppose the market drops sharply just before I retire?” My response to this question seemed to calm her down. I explained that the purpose of that part of her portfolio was to accumulate funds that would be then spent down until she attained ages 70 and 72.

With respect to the portion of her portfolio, she intended to live off of when she retired, the stocks will not be sold on the date she retires. They will remain intact, and her withdrawals will occur in small portions for ten years until age 72, when she would no longer need any withdrawals from those funds. A simplistic illustration is that she would have accumulated funds through her retirement date at age 62 and then would make monthly withdrawals until she reached age 72, when the RMDs would start.

The reason for switching some funds into the stock market is to provide for growth over that period in addition to the interest or dividends. At her age, the future would be a long time, and some added growth amounts would serve her better, providing greater security. A broad-based mutual fund or index fund would give some hope of growth consistent with the overall growth of the economy, with the expectation that there would be a growing economy. Risk was always present, but she had a 10 to 20-year investment horizon and with inflation jumping up, keeping excess money in fixed income would likely not have her keep up with inflation. By the way, her rainy day funds were separate from the investments we were looking at, and those funds would remain fully liquid and without risk of diminution.

The money she would need annually starting in ten years would be approximately 10% of that portion of her portfolio. That accumulated fund would be liquidated over a 10-year period. This would provide for monthly cash flow and continued growth in the remaining portion of that fund. That fund would not be completely sold on the date she retires. At some point, portions would need to be sold since her needs for the money would be over that 10-year withdrawal period. This would require some cash flow management, but it would be a gradual process and not a one-time withdrawal event.

This seems more complicated than it really is. Each piece was explained separately until it was understood, and then they were integrated into the whole plan. You also have to consider that this is very important for the client and could actually affect the quality of her retirement. Taking some extra time to explain and make sure she understands it is a one-time process, and if it provides the comfort and security she needs, then it is well worth the added effort.