Mistake number six in retirement planning is mishandling retirement withdrawals. Often, retirees have misaligned goals. For instance, someone might say that financial independence is a top priority (rating it as a nine out of ten) but only spend a small fraction of what they could. This results in a high legacy goal (rated as ten out of ten) but a low actual financial independence level (possibly a two or three).
To illustrate this, consider a study with a playground: Kids on an unfenced playground tend to stay close, while those on a fenced playground explore more. Similarly, financial advisors aim to help retirees identify their “fence” or safe spending zone and manage it responsibly.
On the technical side, it’s crucial to allocate between safe and aggressive assets. A diversified portfolio typically recovers from downturns within seven years. Hence, having at least seven years of retirement withdrawals in safe assets (like fixed income, cash, or cash value inside a life insurance policy) is recommended. This ensures that you can cover expenses without needing to sell assets at a loss during market downturns.
Mistake number six is mismanaging retirement withdrawals. So whenever we’re sitting down with a retiree client, ben alluded to this earlier in number one of underspending, typically we see that goals are misaligned.
And what I mean by that is somebody may tell us that their financial independence ranked out of one to ten is of a nine importance, but say they’re only spending maybe 10% of the capacity that they’re able to spend.
This means by default, their legacy goals are going to be at a ten out of ten because they’re going to be leaving a large sum of wealth to the next generation and their actual financial independence is maybe a two or a three.
So one example that’s relevant to this is there was a study done on a playground. So there were a bunch of children on a playground with no fence around it. And all the kids kind of stayed around the playground.
They didn’t really go out and explore versus a separate study had a playground and around it had a big perimeter fence built around it. And that second set of kids, they went up and they touched the fence.
They explored the whole ground around the playground. So our job as financial advisors is to show you as a retiree, what’s your fence around the playground, what can you safely spend today, what can you gift today to kids and just be able to manage that responsibly?
Now, on the technical side of that, we of course need to manage that responsibly as well and make sure that we’re allocated properly between safe and aggressive funds. For example, it’s never taken a diversified portfolio more than seven years to recover from a downturn.
So we look at that and we want to have a minimum of seven years of retirement withdrawals in safe assets. So either in fixed income, cash value inside of a life insurance policy, or even cash savings that’s available to you at any time, if the market’s down, you’re able to pull from these assets.
Rather than selling at a loss.
Playlist
In 15 minutes we can get to know you – your situation, goals and needs – then connect you with an advisor committed to helping you pursue true wealth.
EWA, LLC dba Equilibrium Wealth Advisors, is an SEC-registered investment advisory firm providing investment advisory and financial planning services to clients.
Investments in securities and insurance products are not insured by any state or federal agency.
To view EWA’s public disclosure, registration, Form ADV and Part 2B’s, click here.
To view EWA’s Client Relationship Summary (CRS), click here.
