Going through the process of creating an income plan for your retirement does not mean you are done when the numbers on paper meet your immediate expectations. A successful plan depends on regular analysis and adjustments. Both might be required either because your goals change, or the world shifts.
That is the benefit of an income allocation plan over other types of planning.
When I wrote an article called Don’t Bet Your Retirement on Monte Carlo Models, I suggested reliance on safe sources of income including annuity payments, and a modest outlook on the market to avoid huge ups and downs that you can’t control.
I did not suggest that you take your money out of the market entirely. Stocks, after all, offer a history of increasing value over time. The hair-raising loss of value, though occasional, tempts some investors to avoid the roller coaster ride and thus miss out on the longer-term – and sometimes muscular – increases in the market value of equity securities.
How to maintain discipline and “stay the course”
What should you do when the Dow Jones average falls for most of a month, or pundits express concerns about a looming recession? Having less of your income depend on the market helps. Diversifying your source of withdrawals (primarily your traditional rollover IRA) in a balanced portfolio of stocks and bonds is a plus. And I advocate this: Consider thinking of your investments not as stocks and bonds, income annuities and savings, but as sources of income divided into interest-portion, dividend-portion, annuity payment-portion, and withdrawal-portion.
It is also important to remember that you can always evaluate your Income Allocation plan and update that plan as circumstances change. We call that “plan management.”
Let’s look at an example of a female client who retired at 70 about 10 years ago and adopted an Income Allocation plan. She had $1 million in savings at retirement with 50% in a rollover IRA and the balance in personal after-tax savings. Her stock market outlook was modest, at 6% per year. The market has performed as expected over the first 10 years and she has already received $505,000 in income from the original plan. Next year’s expected income is $56,000. Her income is planned to grow at 2% per year until age 85, continue for life, and still leave of a legacy of over $600,000 at age 95. She feels good about it.
A change of circumstances
Then the stock market goes into a nosedive with a 20% loss in just a few weeks. (Steep drops are not unprecedented. Between the beginning of October and the end of December 2018, the Dow average lost nearly 19 percent.) What should our retiree do in this situation? She may legitimately feel that her financial future is vulnerable. Should she cancel the trip she had planned? Or cut back on gifts she had penciled in for the grandkids?
No. Before taking any drastic action, she gets an update of her plan, based on the current value of her stock portfolio. Here’s what she’d see.
- This year’s income continues at $56,000
- Percentage Increases in income to age 85: 1.5% vs 2.0%
- Legacy at age 95: $520,000 vs $600,000
What do these numbers mean? And what should she do?
First, the change in next year’s income is not as dramatic as she had feared.
Second, while she understands that there is no free lunch, the updated plan absorbs the market shock and converts that into lower increases in income to age 85 and a lower legacy to her kids and grandkids.
Third, the plan she adopted originally acted as a shock absorber because of the large proportion of safe income.
Now, should she accept the updated plan or request that it be further modified to meet a new set of objectives? For instance, perhaps she wants to increase the amount of financial legacy. She can make adjustments to her plan if she wishes, and that is when she should talk to her advisor.
Planning is continuous
In any case, the continual review and refinement of her plan together with a smart and safe long-term strategy worked best for her. What you need is the ability to update your plan when needed without giving up the elements that made sense when you first put it together.