There are many potential strategies retirees can utilize to safeguard their retirement savings while also maintaining an adequately liquid fund to cover unexpected costs that might arise due to emergencies.
Having a liquid emergency fund, like a savings account or money market fund, of between six and 12 months of living expenses can provide financial protection from the unforeseen. It can prevent a situation where the retiree needs to sell investments or tap into some accounts earlier than they initially planned.
Bucket Strategies
Keeping different “buckets” of assets can help retirees maintain funds for immediate and short-term needs while preserving low-risk investments and more growth-oriented accounts for long-term sustainability.
The short-term bucket would typically include cash and cash equivalent accounts, including an emergency fund and enough cash to cover living expenses. A medium-term bucket may include the more conservative investments like CDs, bonds or bond funds. These types of assets are relatively safe and stable while still sustaining some growth. They can also be liquidated relatively quickly in an emergency if unexpected expenses arise that can’t be covered by an existing emergency fund.
The longer-term bucket can include more growth-oriented investments, like equities and ETFs, that adhere to whatever risk level a retiree is comfortable with maintaining.
Going into retirement with separate buckets of assets may provide a sustainable balance that gives retirees peace of mind without sacrificing portfolio growth altogether.
Withdrawal Strategies
There’s more to withdrawal strategies than simply making required minimum distributions (RMDs). Several concerted strategies can potentially be leveraged to help promote sustainable spending and portfolio protection during retirement.
The guardrail strategy can be effective, but does require active monitoring and management. It typically entails adjusting withdrawals from retirement accounts based on the portfolio’s performance, such as increasing the withdrawal rate if the portfolio’s value grows beyond a set threshold. Conversely, a drop below a set threshold may justify a reduction in withdrawal amounts to prevent accelerated depletion. This can be especially attractive due to the understandable desire of retirees to avoid selling investments that might regain their value if market conditions improve in the future.
Retirement savers may also want to learn about different dynamic spending rules. These strategies typically include adjusting withdrawals based on both market performance and inflation. The goal is to pursue a withdrawal strategy that balances both considerations while preserving liquidity and preserving the portfolio’s value.
Some retirees also use the floor-to-ceiling method by deciding in advance on a minimum and maximum withdrawal rate. If returns are high, account holders can withdraw amounts closer to the ceiling. In years where market or portfolio performance is weaker, the saver can reduce withdrawals closer to the floor amount.
Tax-Efficient Withdrawal Strategies
Some retirees may derive income from accounts or investments with different tax liabilities. For example, they may have a rental property, a Roth IRA, a brokerage account and a traditional 401(k). There are a variety of tax planning strategies that can help flatten liabilities during years when a retiree’s income spikes due to the sale of high-value property or investments.
Savers can also plan ahead and rely primarily on after-tax accounts or asset sales that require a lower capital gains rate rather than their normal income tax rate during high income years.
Individuals with complex or high-value assets may also benefit from consulting with a tax preparer or financial advisor on various credit or deduction strategies. For example, they may be able to claim losses or make charitable contributions to minimize their tax burden when it will have the greatest impact.
Helping Phoenix Retirees Balance Liquidity, Asset Protection and Growth
The financial advisors at Fullerton Financial Planning are committed to helping retirement savers, investors and current retirees develop solutions tailored to their unique portfolio and financial situation. We understand the importance of maintaining peace of mind in retirement and strive to provide knowledgeable guidance based on your situation. Call us at (623) 974-0300 to learn about your options.
