By: Andrew Hasz, MBA, Financial Advisor
The closer people get to retirement, the stronger the impulse to monitor investments. When the market rises, it’s easy to feel good and think about retiring early, and when the market goes down, it’s common to feel the opposite. Both are
understandable and natural responses.
To get an idea for how swings in the market can impact retirement planning, just look at the last two years:
2022 was a historically down year for portfolios. Overall, the S&P 500 fell by 19%, making it one of the 10 worst performing years out of the last 90. By the end of 2022, it was perfectly reasonable to be second guessing retirement plans. Market performance improved significantly in 2023, with the S&P gaining 24.2% for the year. Now, some of the same people who just a year ago talked about postponing retirement, are thinking about retiring early. The big question is why as investors do we change our sentiment so quickly?
None of this is surprising – it’s human nature. At the end of the day, planning for retirement is just as much about our emotions as it is about our financials. The problem is that making decisions about retirement based on market performance for a single given year is not a sound strategy.
The Best Plan is to Have a Plan and Stick to It
Instead of reacting to the market, we help clients be proactive by working with them to develop a retirement plan that reflects their individual goals. Then we help them stay the course, so they don’t get distracted by the market’s inevitable ups and downs. We constantly monitor performance and finetune portfolios along the way, but any adjustments we make are in service to the greater plan, which is intended to build the wealth necessary for a successful retirement.
As you get closer to retirement, there are many components of your plan that need careful management. Here are some factors to consider as you think about when you can retire.
- Withdrawal Rate
One of the first questions to ask is how much you can afford to withdraw from savings to live on. If you withdraw too much from your portfolio, you risk being left with a shortfall later in retirement. Calculating an accurate withdrawal rate requires deep and complex analysis, but if you just want a general idea, a frequently used rule of thumb for retirement spending is a 4% withdrawal rate. Ask yourself, if you were to withdraw 4% from your portfolio each year, would that amount be enough to support a comfortable lifestyle? - Impact of Inflation
Another major factor to consider is inflation. When inflation goes up after you retire it increases your cost of living, and if your living expenses rise higher than income from your retirement savings can sustainably generate, you risk having to change your plans. More importantly, the concept of inflation and its impact on retirement savings reinforces the need to stay invested. Our investments change value over time not only during our working years. The growth in a portfolio continues to be a benefit into retirement and helps to fund the later stages of retirement beyond the initial window. - Changes in Personal Cost of Living
How will your life change after retirement and how will that impact your cost of living? Some people look forward to travel and plan on several big trips each year. Others divide their time between two homes so they can winter somewhere warm. Still others may sell their home and move to be near grandkids or to simply enjoy life in a dream destination. It is also common to see expenses decrease. Whatever the choice, you need to anticipate potential changes in your personal cost of living so calculations are based on accurate information. - Tools to Help Manage Transition to Retirement
As you think about when you want to retire, here are some of our strategies to help you achieve your retirement goals.- Dynamic Asset Allocation
We diversify your portfolio, adjusting the asset classes, to take advantage of current market conditions and help fulfill your long-term and short-term goals. As you head into retirement and your goals shift, we often will dynamically adjust your portfolio allocation to meet your new income needs. - Bucketing Strategies
One way to look at your portfolio is a concept referred to as asset bucketing. The labels for the different buckets are interchangeable, but the concepts are applicable to the majority of investors. Bucketing separates assets according to their function and is a good way for investors to understand the unique purpose of specific assets and accounts. From real estate to a brokerage account, each bucket has a purpose depending on its use case.- Protect
The Protect bucket comprises not only “secure” assets but also the income possibilities inherent in human capital. This encompasses what you can earn through your ongoing work and the application of your talents. - Live
The Live bucket holds investment assets—funds actively working to support your lifestyle over the long term. These assets represent long-term investments that continually operate on your behalf and are subject to market fluctuations. - Dream
The Dream bucket is exactly that—savings for big dreams. It’s important to keep in mind how your dreams fit into your long-term financial plans for success.
- Protect
- Dynamic Withdrawal Strategies With dynamic withdrawals, retirees can adjust how much they take out of their accounts each year, with an annual spending floor and ceiling to ensure they stay within an appropriate range. Dynamic withdrawals allow a maximum amount during a certain year, as
well as guidelines for how much we can withdraw on a regular basis. Not only do they provide financial flexibility, dynamic withdrawals also give retirees peace of mind knowing they are staying within acceptable parameters for withdrawals. Think of them as guardrails that keep withdrawals in line while providing some flexibility to our overall withdrawal strategy.
- Dynamic Asset Allocation
If you have questions about when you can retire and what you can do now to prepare, contact our team at Marshall Financial Group. We can help you understand when retirement makes sense for you and enjoy a retirement that meets your goals.