Asset Allocation Throughout Retirement

Often as clients get closer to retirement, they find themselves “visiting their money” (checking their account balances) much more often. They pay more attention to the financial news and call their JMG financial advisor more often to ask if they should be raising more cash and getting out of equities. I get it – going from a steady paycheck to being reliant upon an investment account that has proven itself to be anything but steady feels like walking off a cliff. If you find yourself in this situation, it’s a good time to revisit your target allocation with your JMG advisor.

One of the first things your advisor would likely review with you is your portfolio relative to your annual withdrawal needs. The lifetime financial plan we build for clients incorporates historical market returns, inflation and detailed cash flow projections. For a more general analysis, you can start with rough math based on the 4% rule. This rule of thumb in the financial planning world is based on research by William Bengen done in the 1990s¹ (as well as more recently confirmed). Using historical market return data through various economic environments, Bengen determined that retirees can safely withdraw an amount equal to 4% of their starting portfolio balance and then adjust for inflation for the next 30 years without running out of money.

Let’s say a couple has an annual budget of $150,000 with an investment portfolio worth about $4 million. Their combined social security is about $60,000, leaving them a cashflow shortfall of $90,000. The 4% rule would suggest they could safely withdraw about $160k per year, but they only need to withdraw $90,000. This client is overfunded, meaning they have more assets than needed to cover their cash needs.

If the overfunded client is primarily concerned with meeting their own cash needs with as little stock market exposure and related volatility as possible, they may be able to afford to allocate more to fixed income (bonds). Fixed income won’t grow long-term purchasing power as well as equities, but it generally doesn’t suffer the drawdowns or prolonged downturns that the stock market has experienced occasionally over its history. In an overfunded status, plan success is not as reliant on the long-term growth of equities. Perhaps this couple had a relatively high equity allocation that put them in this favorable position, but now that the portfolio is a primary source of support, they may be more comfortable reducing the risk.

If the client places a high priority on leaving a financial legacy to future generations or charities, their advisor may work with them to think more in terms of “buckets”. Using the 4% rule and an annual withdrawal of $90,000, the client might think about the amount above $2.25 million ($90k/4%) as being for the kids. Money designed to be left to children 20-30 years from now is definitely considered long-term and returns will be maximized by investing that “bucket” in equities.  If funds designated for the children remain in the client’s estate (rather than into an irrevocable gift trust), they can also serve as a cushion or backup, while still being invested aggressively.

Another way to think about your allocation is to go back to the role of equities and fixed income in your portfolio. Stocks are for growing long-term purchasing power while bonds and cash can serve as the “buckets” to tap when stocks are down. Going back to the 4% rule example above, a 40% allocation to fixed income provides a relatively stable source for ten years of withdrawals to wait out a long downturn in equities.

No one can predict the future, but history shows our financial markets have weathered tough times before. Your advisor has plenty of tools to help you build an asset allocation that fits your goals, helps you feel confident, and lets you enjoy retirement.  If you’re feeling nervous, reach out! As always, we invite you to share this article with others who may also find it insightful.

Footnote:

¹ Bengen, William P. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning, October 1994.

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