We recently discussed how to create a personalized retirement income strategy with Bob Witt, CFP®, RICP®, a financial advisor in Savant’s Lincolnshire, IL office.

Savant: Often, investors want their advisor to “manage the portfolio” for them as they enter retirement. We commonly hear they are planning to follow the so-called “4% rule.” That sounds like a simple solution. What do you think about that?

Bob Witt: “It is simple: You add up all of your investments and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation. Unfortunately, it doesn’t work for most situations. It can have numerous challenges, such as sequencing of market returns in the early retirement years, inflation being higher or lower than expected, the portfolio composition, which may not be a good fit for that rule, as well as a host of other factors that could impact the outcome such as taxes and fees. The bottom line is that the 4% rule may be too simplistic for most.”

Savant: Another strategy we often hear about includes focusing investments in high-yielding bonds or stocks to create an income stream as a paycheck. Is that a good strategy?

Bob Witt: “If retirement income planning focuses solely on one factor, such as higher yielding investments, it could mean the investor is taking on higher risks than necessary, and that the portfolio may not provide a sufficient blend of risk and return for a robust income strategy. For example, using higher-yielding bonds for more income, you have to either increase the maturity or decrease the credit quality. Both increase risk and add volatility. On the stock side, while dividends matter and can help lower volatility, a high-dividend yield strategy may not automatically equate to a better outcome. For one, most of the total return from stocks historically comes from price appreciation. Second, when you attempt to overweight high-dividend stocks, you naturally underweight other types of stocks. In other words, you are betting that those dividend stocks will outperform the underweighted stocks. Using a broader total stock market approach would be more diversified and potentially have less risk.”

Savant: So how do you approach the concept of retirement income planning for clients?

Bob Witt: “I can summarize it in four foundational steps: 1) get focused and organized, 2) identify expectations and areas of concern, 3) explore possibilities for improvement, and 4) implement the income plan. If you are getting close to retirement, it is a good time to get focused and organized. This involves answering questions and creating an initial financial plan as a baseline to put everything in perspective. This helps us understand whether your retirement is on track or needs adjustment. The next step, identifying expectations and areas of concern, is where we stress test variables to see how they affect the probability of success for the baseline plan. This includes working with factors you can control (i.e. retirement age, goals, savings levels) and factors you can’t control (i.e. inflation, Social Security cuts, low returns, longevity). It’s also a good time to drill down on other questions, such as where you will live, what you will do with your days, and what other things could impact your budget.”

Savant: Those first two steps sound very robust. What would someone need to do in the last two steps of personalizing their retirement income strategy?

“In my opinion, exploring possibilities for improvement is just as important as the first two steps. This step involves using special planning concepts and cutting-edge tools to help improve a plan’s outcome. For example, exploring a tax-efficient withdrawal strategy can help save on taxes. Other factors to consider include Social Security, Roth conversions, charitable giving, and Medicare planning, which may require specialized planning to help improve an outcome as well. In the final step, we help implement the income plan, which is where we design the investment approach. I have found that there are different “income personalities” that affect the investment plan. For example, some clients need the safety of a cash cushion, while others are comfortable with higher levels of variability in returns. A successful retirement income strategy is one with a high probability of success. But just as important is the client’s level of understanding and ability to stick with the plan.”

Author Robert J. Witt Financial Advisor

Bob has been involved in the financial advisory industry since 1997. He earned a bachelor of science degree from the University of Wisconsin-Stevens Point and specializes in working with people transitioning into retirement.

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