In this Q&A, we’ll discuss the important decisions to consider as you shift from wealth accumulation to wealth distribution in retirement.

Q: What Factors Should I Consider as Retirement Nears?

A: Plan for how to create a sustainable income stream in retirement by:

• Evaluating how prepared you are for a downturn in the market
• Devising a proactive strategy to minimize taxes
• Analyzing the “productivity” of your assets

Q: Should You Think Differently About Investing as You Near Retirement and Shift From Accumulation to Distribution of Wealth?

A: Many of our clients have created wealth by concentrating their investments either in a business they own or in the stock of an employer. This can be an effective way to grow assets, but when it comes to creating a “paycheck” in retirement, the objectives change significantly. The overall goal needs to shift from concentration to diversification. To create sustainable cash flow, there are two key objectives: 1) invest in assets that are more “productive” to meet income needs and 2) invest in assets that minimize your downside risk.

Q: What Does the “Productivity” of My Assets Mean?

A: Simply put, productive assets are those with the ability to generate profits and a sufficient amount of ongoing cash flow (in the form of dividends and interest). A productive asset is one primarily intended to provide stable cash flow, month after month, such as a rental property, dividend-paying stocks or other income-generating investments.

Q: What Should I Consider Before Starting Withdrawals From Retirement Accounts?

A: The timing of withdrawals against the backdrop of a market downturn, for example, could have a significant impact on the long-term value of your portfolio.

This timing phenomenon is called “sequence of returns” risk. Say, for example, you retired in late 2007, prior to the market crash in September 2008 and the so-called Great Recession. Those cascading market corrections likely drastically reduced the value of your investment portfolio, making it consistently harder to recoup your losses as you were taking withdrawals. The lasting result: a substantial decrease in the income available to you throughout retirement. To learn more, read our article about sequence of return risk.

On the other hand, if you had retired in early 2009 amid a recovery in the S&P 500 (interrupted only briefly by the COVID-19 shutdown), the gains in your portfolio would have compounded its value, thereby making it more likely you would have sufficient savings to draw down from over the course of your retirement. In essence, you are taking withdrawals from a continuously higher base.

Q: How Can I Mitigate Sequence of Returns Risk?

A: Working with your financial advisor to run worst- and best-case scenarios for your portfolio’s value over time can help you plan for up and down markets and adjust withdrawals from your portfolio as needed. An advisor can also help you with strategies for boosting the productivity of your assets to help reduce sequence of returns risk. At the same time, it could enhance the resiliency of your portfolio by enabling you to avoid selling assets at a loss to meet your cash flow needs should there be a prolonged market slump.

Consult With Your Wealth Team

Work with your advisor to incorporate high-productivity assets in your retirement portfolio. This simple step could help you withstand market downturns and ensure a reliable stream of income that enables you to maintain your pre-retirement lifestyle throughout your retirement years.

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