One of the most difficult adjustments for clients as they enter retirement is to flip that switch from receiving a paycheck into their bank account to withdrawing funds from their investment accounts. We have found that many clients have actually worked longer because they just couldn’t reverse this thinking.
Investors are savers and for savers to turn off that mentality and begin withdrawing funds from their accumulated savings is daunting. Consuming and not collecting feels unnatural to those who, for more than 30+ years, have worked diligently to grow their investment portfolio.
How does WPC guides clients through this transition so they can enter retirement with confidence.
- Know, Plan and Demo your Expenses – Have clear spending plans and stay aligned with them over the many years. Avoid pulling more out than your portfolio can sustain. A distribution rate of 4-5 % will allow your portfolio to grow which helps your investments weather inflation and volatility through the years. Seeing the Combined Details report that shows the total outflows and continued portfolio growth over the years line by line can be very reassuring.
- Understand all Income Sources –Take inventory of your Social Security benefits, pensions payments, deferred compensation, rental or business income payments. Know which payments are fixed and which have a COLA factor and forecast accordingly. Then we will determine how much you will need to supplement from your investment portfolio always mindful of the above distribution rate recommendation and taxation.
- Discuss Taxes – The tax code is confusing and understanding how the different sources of income or how dividends/interest or capital gains are taxed is important. Having clients withdraw income in the most tax efficient manner is central to our income planning. Helping them understand how taxes are paid now that they no longer withhold through payroll can calm some of the fears. We will work with them to determine if tax withholding from an IRA or paying quarterly estimated payments suits them.
- Understand Inflation – Inflation assumptions are a part of our financial planning right from the start, but inflation is insidious during retirement, especially in healthcare. We demonstrate the effect of inflation on one’s goals in our reports and how the appropriate distribution rate will allow for portfolio growth year over year which helps the investment portfolio keep pace with inflation. Showing adjustments for inflation helps clients visualize that they are not on a fixed spending plan that doesn’t allow for future increases.
- Review your Investment Allocation – Of particular importance in retirement is investment philosophy and decision-making. Reviewing the investment allocation and explaining how the cash, fixed income, alternatives and equities work together in a diversified portfolio to provide both income and growth is essential. We position Growth/Income or Income/Growth portfolios with 3 -4 years of income so that they can withstand down markets.
- Establish An Electronic Payment – Operationally, we set up an ACH draft to your checking account either monthly, bi-weekly or however often you choose to replicate the feel of receiving your paycheck exactly like all the years prior.
Clearly understanding and being able to visualize how your income will be sourced, distributed and taxed is something that WPC has been discussing and explaining to clients for over four decades. Learning how to plan and spend in retirement takes coaching and clients should allow for an adjustment period.
