How Your Investment Strategy Changes During Retirement

The Retirement Transition

As you approach retirement, it will be crucial to reassess your financial goals and adjust your investment strategy accordingly. Where your priority was previously focused on growing your nest egg, you’re now shifting towards creating a sustainable income stream that will support you and your loved ones throughout the next chapter of your life. 

When you were still working and contributing to your retirement account, you had time to bounce back from potential market turbulence. If your portfolio took a hit during a market downturn, it was easier to ignore the chatter of market volatility, continue to fund your retirement accounts and take advantage of long-term growth for a retirement that seemed far away.   

However, once you’re in retirement, that flexibility changes. You need the funds in your nest egg now—and you also need them to last for decades into the future without losing a large percentage of their value. As a result, your approach to investing has to change. Instead of investing with a growth mindset, starting to view your portfolio in different “buckets” can help organize your retirement income. This is all part of going from an accumulation to decumulation mindset with your investments.

Going from Accumulation to Decumulation

The accumulation phase is something most investors are familiar with: you continue to contribute money into your retirement savings accounts and plan for long-term growth to grow your money. However, the decumulation phase can often feel less stable and predictable. In many ways, it goes against everything you’ve been taught about investing—for retirement and otherwise.

This is why viewing your retirement portfolio as different ‘buckets’ can help. For example, you may have one bucket that consists largely of cash, money market funds, and investment grade bonds to draw down on when you first retire for your immediate cash needs. Your next buckets could be focused on your mid-term and long-term goals and invested accordingly based on when you think you’ll need to start withdrawing from them. This strategy can allow you to plan for decumulation while still taking advantage of long-term growth and affording you more investment time in the market to support you later in life.

The emotional aspect of shifting from saving diligently during your working life to tapping into those hard-earned savings can also be daunting, even if you have a strategy in place for organizing your portfolio. Recognize this mental challenge, pause, and prepare yourself with a comprehensive financial plan. Remembering that your savings are there to enhance your quality of life in retirement can make the transition smoother, and even fun. 

Understanding Your Retirement Cash Flow

Retirement income often comes from various sources, including Social Security, pensions, and personal savings. As you set up your decumulation strategy, getting a clear sense of the type of cash flow you need and where it will be coming from can help set you up for success. Here are a few initial steps to take:

1. Assess Your Expenses: Start by estimating your essential living expenses, including housing, healthcare, and daily necessities. You’ll also want to consider discretionary expenses for hobbies, travel, and other lifestyle choices.
2. Identify Reliable Income Sources: Add up your reliable income sources, such as Social Security or income from a pension plan. 
3. Determine Your Portfolio’s Role: Think about how far your investment portfolio will go towards covering your immediate and future financial needs. You might approach this as the total amount you’ll need saved at retirement, or the expected return you can rely on as you continue to stay in the market over this next chapter of your life. 
4. Establish a Withdrawal Strategy: Whether you plan to spend down specific accounts first, or aim to withdraw a certain percentage of your portfolio each year, create a withdrawal strategy that bridges the gap between your reliable income sources and anticipated spending.
5. Think About Portfolio Organization. Again, consider your portfolio as being divided into different buckets. This can help you mentally prepare to spend down specific accounts, create a tax-efficient plan through strategic asset allocation and withdrawal strategy, while still aiming to capture investment growth in the market. 

Remember, an effective retirement cash flow plan is dynamic and should be able to evolve with changes in your life circumstances and the economic landscape. Regularly reviewing and adjusting it will help you stay on track and enjoy a financially secure and fulfilling retirement.

The Importance of Asset Allocation

A well-balanced and diversified investment portfolio is the key to navigating the uncertainties of retirement. While preserving wealth is crucial, exploring investments with growth potential is also important. Striking the right balance between conservative lower-growth and riskier higher- growth investments is the cornerstone of a successful retirement strategy. 

The concept of “bucketing” your portfolio applies again here. You can allocate a portion of your portfolio to be more conservative in order to maintain its value and ensure you can rely on immediate access to the funds as needed. In contrast, another portion of your portfolio may be allocated with long-term growth in mind for the later years of your retirement or leaving a legacy for future generations. 

Balancing Tax Liability

Be mindful of the tax implications associated with different income sources in retirement. The last thing you want is to have your growing nest egg eaten away by hefty tax liabilities that could have been avoided. Developing a tax-efficient investment and withdrawal strategy in retirement is crucial. Here are a few key ideas to consider as you get started: 

• Understand Tax Treatments of Different Income Sources: Different sources of retirement income may be taxed differently. Social Security, pension income, and withdrawals from traditional IRAs or 401(k)s may all have distinct tax implications.

• Roth Conversions: Consider converting some traditional IRA or 401(k) funds into Roth accounts. While this incurs taxes at the time of the conversion, qualified withdrawals from Roth accounts are tax-free, providing tax diversification in retirement.

• Manage Required Minimum Distributions (RMDs): Once you reach the age of 73—or 75 if you were born in 1960 or later —you generally must take RMDs from traditional tax-deferred retirement accounts. Failure to do so can result in significant penalties from the IRS. Be mindful of the tax implications and plan your distributions strategically.

• Tax-Efficient Withdrawal Strategies: Plan your withdrawals to minimize tax impact. This could involve withdrawing from your taxable accounts first, then your tax-deferred accounts, and finally your tax-free accounts such as a Roth IRA.

• Utilize Tax Credits and Deductions: Take advantage of available tax credits and deductions for retirees. This could include the Elderly and Disabled Tax Credit or deductions related to medical expenses.

• Consider Health Savings Accounts (HSAs): If you have a Health Savings Account, explore using it for qualified medical expenses. HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

• Factor in State Taxes: Be aware of state taxes as they can vary widely. Some states don’t tax retirement income while others may have specific rules for taxing pensions, Social Security, or other sources.
• Charitable Giving Strategies: If you plan to make charitable contributions, explore tax-efficient strategies like donating appreciated securities from a taxable account or implementing a qualified charitable distribution (QCD) strategy from your IRA.

By proactively planning for your tax liability in retirement, you can potentially minimize your tax burden, grow your available tax-diversified investments, and make the most of your retirement income to fund you for the rest of your life. Remember, your personal tax situation is unique, so tailoring strategies to your specific circumstances and goals are key to maximizing long-term tax efficiency.

Partnering With a Professional

Developing a thoughtful investment strategy in retirement calls for a very different set of considerations and emotional intelligence for many investors, and it requires some careful attention and homework before implementing. When you team up with a trusted advisor, you can build a plan that potentially allows you to:

1. Minimize your tax burden.
2. Create seamless cash flow for every season of your next chapter.
3. Continue to take advantage of market growth while balancing the need for more conservative funds that fuel your lifestyle.

When you partner with a financial planning team, they’ll help you effectively pivot and tailor your strategy as needed when your lifestyle, health, or goals change and adapt. 

Are you ready to retire with confidence? Book a call with an Abacus financial advisor today. We’re here to help you build a strategy that mirrors your goals, values, and sees you through your retirement journey. 

Sources: 

“Retirement plan and IRA required minimum distributions FAQs” IRS.