MMM Newsletter and Website Header 10.2.15

By Carrie Schwab-Pomerantz, Charles Schwab & Company


Key points


  • Now that you’ve built your retirement nest egg, how can you make it last? Switching from being a saver to a spender means having an entirely new approach to money.


  • We’ll walk you through nine ways to help maximize your retirement nest egg.

You’ve been building and protecting your retirement nest egg for decades. You’ve been anticipating the day when you could say goodbye to the nine-to-five grind and finally have time for whatever activities or challenges come your way—whether that’s working part-time, volunteering, or traveling, or even starting a new business. Whatever your dreams, this is your time. What surprises you, though, what you hadn’t anticipated, was how tough this transition would be psychologically—and how vulnerable you would feel.

I’ve heard variations of this story so many times that I know it isn’t necessarily a function of one’s wealth. Switching from being a saver to being a spender means having an entirely new approach to your money.

It can be tough regardless of the size of your portfolio. To ease this transition, my colleagues at the Schwab Center for Financial Research have come up with some pretty straightforward guidelines. They aren’t intended to be rigid directives. But our experience has shown us that these fundamentals can help reduce your financial stress and support whatever retirement lifestyle you choose.

Also, think about consulting an objective financial planner as you transition into retirement. This is one of those times in your life when some professional guidance can go a long way.

No. 1: Review your situation

No matter how much or how little you’ve saved, make sure you know exactly where you stand. Gather the latest statements from all of your accounts, and create a net worth statement (your assets minus your debts). Then take a look at your cash flow (money in, money out) for the last couple of years, and use this information to create a projection for the future.

Caution: If you want your portfolio to last for 30 years, plan to withdraw no more than 4% of its value in the first year of retirement. After that, you can adjust the amount for inflation.

No. 2: Maintain at least a year of cash

Set aside enough cash to cover at least one year of spending. This is the amount that you’ll need in addition to the income you can count on—for example, from Social Security, a pension, or real estate investments.

No. 3: Consolidate income in a single account

Combine all of your non-portfolio income—which could come from Social Security, a pension, an annuity, whatever—into one account. You can also put portfolio income—for example, interest and dividends—into this account. This account will be your primary source of cash, allowing you to more easily track your income and spending over time

No. 4: Match your investments to your goals and needs

Select a mix of investments in keeping with your personal goals, time frame, and risk tolerance. For most people, this means gradually moving away from stocks and toward bonds and other fixed income, as well as cash. But it’s important not to abandon stocks altogether since they can help your portfolio keep up with inflation. Bonds not only will provide you with income, but also will act as a buffer against market volatility. Cash investments protect you from having to sell your stocks or bonds at a bad time.

No. 5: Cover essentials with predictable income

We recommend that you review your income and expenses, and then divide your expenses according to whether they’re essential or discretionary. Ideally, you’ll be able to cover all of your essentials with predictable income. That way, you can cut back on nonessentials in a lean year

Note: Annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.

No. 6: Don’t be afraid to tap into your principal

It’s the rare individual whose portfolio is large enough to live off dividends and interest alone. Your goal isn’t to avoid tapping into your principal at all, but to do it in a prudent way. Follow the 4% guideline: In essence, you can withdraw up to 4% of your portfolio’s value each year, increasing with inflation, and have 90% certainty that it will last for 30 years—provided that you are invested in a well-diversified portfolio with at least 40% stocks.

Smart Move: If you have mutual funds in taxable accounts, consider having the distributions automatically swept into a money market fund. You may not have to sell as many shares that way.

No. 7: Follow a smart portfolio drawdown strategy

When it comes to creating your retirement “paycheck,” tax-efficiency is king. Here’s the gist:

  • First, draw down your principal from maturing bonds and CDs.


  • Then, if you’re 70½ or older, take your required minimum distribution from your IRAs or other tax-deferred accounts, focusing on overweighted and lower-rated assets.


  • Next sell overweighted and lower-rated assets in your taxable accounts.


  • And finally, sell overweighted and lower-rated assets in your tax-deferred accounts. Sell from your traditional IRA before you move on to your Roth IRA.

The rationale behind this order is that withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income, typically at a higher rate than the long-term capital gains rate that you’d pay when you sell investments held for more than one year from your taxable accounts. Also, leaving more money in your IRA or 401(k) provides more time for tax-deferred compound growth.

No. 8: Rebalance to stay aligned with your goals

It’s important to review your retirement nest egg portfolio asset allocation at least annually. If one asset class has grown beyond your plan, it’s time to pare it back. Once you’re retired, this can be a prime opportunity to sell assets to generate cash.

Example: Let’s say that your target asset allocation is 40% stocks and 60% bonds, but your portfolio has drifted to 45% stocks and 55% bonds. You can sell some stocks to generate income, and reallocate anything that’s left over to bonds until you’re back on target.

No. 9: Stay flexible and reevaluate as needed

Life doesn’t just stop changing once you’re retired. Let’s say you want to sell your house and travel the world. Perhaps you’ve received an inheritance. Or maybe you’re starting a business or going back to work. As your needs change or your feelings about risk change, your portfolio and the amount you withdraw should reflect your new realities.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC’s) Monday Morning Minute is crafted to provide decision-maker’s with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.