How will you take money from your retirement account when the time comes? Should you use, if you have such options, the in-plan decumulation/retirement-income products or should you use out-of-plan products? Now, truth be told, most plan sponsors don’t offer and don’t plan to offer in-plan decumulation/retirement-income products ...
Despite the frequency of discussion about the need for retirement income, the 2016 PLANSPONSOR Defined Contribution (DC) Survey data on plan benchmarking shows many plans holding off on utilizing in-plan retirement income products.
For those in or near retirement, the standard investing advice has long been to dump stocks gradually and load up on bonds as you get older. The idea is to reduce the risk that a big stock market decline will wipe out much of your portfolio just when you need the money most.
For some retired or soon-to-retire investors, the "bucket approach" to portfolio planning is a useful guide to organizing and extracting cash for living expenses in retirement. For other investors, the logistics of bucketing raise as many questions as they answer. Are they supposed to move money from bucket to bucket on a regular basis? Should they hold three buckets, or can they get away with just two--cash and everything else? And so on.
A while back I wrote that arguably the most important financial-planning decision you'll ever make is deciding if you can afford to retire. In that column, we explored how to determine if you have enough assets to take the plunge — to cross over from accumulating assets to depending on those assets to pay your monthly bills throughout retirement. The flip side of this monumental decision, and financial planning concern "1A", is choosing the methodology by which you will create a stream of income from a pool of assets.
There are many different strategies that can be used to generate retirement income, including the systematic withdrawal strategy and the bucket strategy. According to a 2011 study, 75% of financial advisors frequently or always use a systematic withdrawal strategy and 38% frequently or always use a time-based segmentation approach — or bucket strategy. The greater than 100% reading suggests that some advisors frequently use both approaches with their clients.
Your financial life, like climbing a mountain, does not end when you reach the summit, your retirement. Getting down safely, or making your retirement income last, requires a set of different strategies. How can you withdraw your money without depleting it?
Whatever your bucket list, odds are that to-do list of life’s goals will require more than inspiration and derring-do. You’ll probably need a bucketload of money, and that necessitates some financial planning.
Especially if you’re over 50, your answer to that question may be the most important investment decision you make this decade. To help you along, the chief of the U.S. Federal Reserve has offered up a surprisingly blunt assessment.
Q: I don’t understand why all of the financial experts recommend that retirees withdraw only 4 percent (or less) of their nest egg in retirement. It seems needlessly conservative.
I think of it this way: if you did that, you would be literally guaranteed enough money to make equal withdrawals for 25 years. If you wanted growth to keep up with inflation you could just invest the money in Treasury Inflation-Protected Securities (TIPS), which I know you like.
Q: I am an odd duck because I am retired with zero in bonds. I do not like them, and at this point rates have nowhere to go but up. I am 60 and single, and I own two homes outright. Instead, I keep two years of cash to get me through the next recession. … Do you think I’m crazy for being all equity and no bonds? I hold individual stocks (60 of them), no funds. I want to control my tax liability.
A: I don’t think you’re crazy (unless it’s crazy like a fox). Your approach is reminiscent of the “bucket strategy” in the retirement literature. (The outline of your approach is a classic bucket strategy, although the details are unusual.) The core idea of the bucket strategy is to have one bucket with enough safe savings to handle two to three years’ worth of spending. The safe savings are held in bank accounts, online savings accounts and similar savings investments.