Saving for Retirement vs Living in Retirement: Why the Math Changes
Why Does the Math Change When You Retire?
For decades, most people have one basic retirement investing goal:
Put money in.
You contribute to your 401(k).
You fund an IRA.
You invest.
You save.
You try to grow your nest egg.
Then retirement arrives and the direction of the money changes.
Instead of putting money in, you start taking money out.
That sounds simple, but I believe it is one of the biggest financial changes that occurs when someone retires.
Accumulating money and distributing money are two very different things.
Why Average Investment Returns Do Not Tell the Whole Story
I enjoy working with analytical people, and we see plenty of engineers and IT professionals in our office.
I especially love it when someone comes in with a spreadsheet.
One gentleman had mapped everything out beautifully.
He knew how much he had saved. He calculated how much he would withdraw. He accounted for inflation.
Then he essentially said, "If I can average 4 percent per year, this works."
And mathematically, he was right.
The problem was that he was still investing in the stock market.
His assumption was that the market should average more than 4 percent over time.
I agreed with him.
But there was one problem.
The market does not go up 4 percent every year.
What Happens If the Market Falls After You Retire?
Markets rise and markets fall.
You could have several strong years followed by a significant decline.
And that decline can become especially important when you are withdrawing money at the same time.
Suppose you retire and immediately experience a major market downturn.
You still need income.
You still have bills.
You still want to travel, eat out, play golf and enjoy your retirement.
If you have to sell investments that have fallen significantly in value to generate that income, you may be locking in losses while reducing the amount of money available to participate in a future recovery.
That is very different from your working years.
What Is the Difference Between Accumulation and Distribution?
Accumulation is the phase when you are primarily putting money into your retirement accounts.
Distribution is the phase when you begin withdrawing money to support your lifestyle.
During accumulation, a market decline can actually provide an opportunity to continue buying investments at lower prices.
During distribution, you may be selling those investments to create income.
That changes the equation.
This is also why sequence of returns risk can become important in retirement. It is not simply the average return you receive over time that matters. The order in which those returns occur can also affect a portfolio when withdrawals are being taken.
Why Give Your Retirement Money Different Jobs?
One way we approach this issue is by segmenting money according to purpose.
We may have money dedicated to income.
We may have money dedicated to longer term growth.
And we may have money dedicated to liquidity.
I like thinking about money this way because not every dollar needs to accomplish the same goal.
Money you may need for income today has a different job than money you may not need for many years.
Growth still matters in retirement.
But so does income.
So does liquidity.
So does managing risk.
And once you stop receiving a paycheck, understanding which dollars are intended to accomplish each goal becomes increasingly important.
Your Retirement Plan Should Connect Your Money to Your Life
At the end of the day, I do not want retirement planning to be only about spreadsheets, percentages and investment returns.
Those things matter because they allow us to answer the bigger question:
What do you want to do?
Maybe you want to hunt.
Go fishing.
Golf with your kids.
Travel with your spouse.
Camp.
Spend weekends at the lake.
Or simply have more freedom to spend time with the people you care about.
Once we know what you want your retirement to look like, we can determine what that lifestyle may cost.
Then we can begin deciding how your money needs to work to help support it.
That is the real transition from saving for retirement to living in retirement.
For years, you have asked your money to grow.
Now you may be asking it to provide income, remain available for emergencies, continue growing for the future and support a retirement that could last decades.
That deserves more than an assumption that the market will average a certain return.
It deserves a plan.
If you are getting close to retirement and wondering how to make the transition from saving your money to using it for income, you are welcome to reach out to our team for a conversation. Call 614 336 7660 or visitLegacyRetirementGroup.com.