Retirement Distributions

Congratulations! You made it through the accumulation side of saving for retirement. Now, you are ready to “decumulate” or begin taking distributions to meet your living expenses in retirement. If you watch the financial news shows, you are probably hearing discussions of what is a “safe” withdrawal rate. A general rule of thumb used to say 4% per year but in the low interest rate environment we have, some are dropping that figure to 3% out of concern of depleting the account too soon. The market cycle can also negatively impact your hard work of saving for retirement. If the market is down when you start taking distributions, studies have shown that can significantly reduce the number of years your money will last.
But there is another method to determine how and when to take distributions. This method requires us to break down your retirement years into “5 year buckets”. For example, we determine what your expected cash needs will be each month for the first five years of retirement. Whatever this amount is needs to be kept in an account that is liquid and is not subject to market ups and downs. Guaranteed income for this bucket is nice!
The next bucket would be for the period 6 – 10 years after retirement. Liquidity is not as important for this bucket but you want the investment selection to be relatively stable. As you approach the 6 – 10 year bucket, you want to reposition the investments to be more liquid because this bucket is going to become your 1-5 year bucket and needs to be liquid to meet your cash needs for that time period.
As you get into the buckets of 11-15 years, 16-20 years and over 20 years, you may be able to choose investments with more volatility because there is more time for losses to be offset with gains. And yes, we do need to plan on 20 or 30 year retirements (maybe longer since we are living longer on average). Remember to reposition the assets in each bucket to reflect where you are in the time period cycles.