Indeed, one of the most daunting transitions for investors is the move from an accumulator of assets to a user of those assets. Forgoing a regular paycheck and turning to your savings to "pay you back" after a decades-long build is a significant shift in mindset.
The questions (and the decisions) involved are many: Have I saved enough? How much can (or should) I take each year? And how should I invest my retirement nut for continued growth?
After all, Americans today could conceivably spend 30 years in retirement. Longevity is on your side like never before, but it requires proper planning to be fully enjoyed.
"Increased longevity has changed everything," says Chip Castille, Head of Global Retirement Strategy at BlackRock. And while those changes have social and public policy implications beyond finance, one conclusion is relatively clear: Better retirements require better saving and investing habits.
For the most part, the onus is on you, the individual, to ensure your assets live as long as you do.
"Defined benefit pension plans are in decline and aren't coming back," Mr. Castille cautions. "Government programs like Social Security can help finance part - but by no means all - of tomorrow's lengthy and expensive retirements."
With that in mind, following are a few suggestions for navigating the transition from wealth maker to income taker - to ensure your just desserts are the palatable kind.
1. Focus on the right number
Before waiving their wages and launching into retirement, investors generally focus on the size of the nest egg they have amassed. But without context, that number is not terribly meaningful. It's the smaller number - specifically, the amount of money you will need each year in retirement - that is most informative. But that number is hard to quantify.
There are generalizations, such as the notion that you would need 70%-80% of your pre-retirement income to live comfortably in retirement. Even then, assessing your nest egg's ability to provide that annual figure (for life) is no easy task.
Recent innovations in retirement income planning, such as BlackRock's CoRI® Retirement Indexes, were designed to help. Your age-appropriate CoRI Index level provides an estimate of how much money you need today to generate each dollar of annual income in retirement. Because the CoRI Indexes take into account current interest rates, inflation expectations, life expectancy and other factors, levels may change on a daily basis. Current index levels are published daily on blackrock.com.
You might find that for each $1 of retirement income, you need $19 set aside today. Armed with this knowledge, you can begin to answer questions like: Have I saved enough? Do I need to adjust my expectations? Should I consider working longer or perhaps saving and investing differently to achieve my goal?
2. Avoid dollar cost "ravaging"
As an accumulator of assets, a dollar cost averaging strategy is a prudent approach. This is a common form of systematic investing whereby you purchase a fixed dollar amount of an investment at regular intervals (say, monthly). In doing so, your dollars buy you more units of that investment when prices are low and fewer units when prices are high.
But beware: As a decumulator, that wisdom works in reverse. If you're taking out a fixed dollar amount on a monthly basis, you're selling fewer shares when prices are high and more shares when prices are low. Ideally, you'd want to sell more units when you could get more for them. Instead, you're ravaging your savings by giving up too many units of it at low prices.
One way to address this is to be very deliberate in how you draw down assets. Don't pull heavily from principal (which can fluctuate in value from day to day). Instead, aim to fund more of your withdrawals from an investment's income component (bond coupons or stock dividends), such that you're not shedding large portions of your underlying portfolio.
3. Pair income and growth in retirement
The conventional wisdom says to grow more conservative in your investment approach as you near retirement. That typically implies increasing your allocation to bonds. However, that's a more complicated proposition today.
"With bond yields at persistent lows - including $14 trillion of sovereign bonds with negative yields - investors now need to take more than double the risk that they did 10 years ago to achieve returns of 5%, 4% or even 3%," says Michael Fredericks, Head of Income Investing for BlackRock's Multi-Asset Strategies group.
Now and then: same yield, more risk
Yield and risk in income portfolios, 2005 vs. 2015
Investing in core bonds alone isn't enough. But stretching into the riskiest corners of the fixed income markets isn't prudent when you have little tolerance for losses. Some ideas to consider in the current market environment:
- All-in-one income solutions that are broadly diversified and actively managed by experienced investment professionals.
- Assets such as emerging markets debt and preferred stocks, which may behave differently and provide some offset to risk in stocks and high yield bonds.
- Dividend-growth stocks, which are currently yielding more than bonds and tend to be less volatile than non-dividend payers.
- Municipal bonds for tax-advantaged yield.
Your financial professional can help you identify a comfortable mix for your portfolio.
4. Withdraw wisely
When it comes to withdrawal strategies, there are options beyond the long-accepted "4% rule." Each has its pros and cons.
While choosing a fixed percentage is a common approach, you want to choose wisely. As shown below, withdrawing 6% instead of 5% annually (at a 7% investment return) cuts a portfolio's livelihood from 36 to 25 years. Withdrawing a fixed dollar amount annually offers greater predictability for budget purposes, but doesn't account for inflation or your changing needs through retirement.
You might also consider an inflation-adjusted strategy; that is, withdrawing an amount you believe sufficient in the first year of retirement, and increasing it by the inflation rate in subsequent years to maintain your standard of living. Or, you could elect to withdraw investment earnings. Taking only the income (e.g., dividends, interest) created by the underlying investments in your portfolio keeps your principal intact and provides the potential for your investments to grow while also generating income. But your income will vary year to year, and withdrawals won't necessarily keep up with inflation.
Of course, you don't have to settle for one approach. The best course might be using different strategies to target specific needs: Perhaps an inflation-adjusted withdrawal strategy to cover essential expenses (utilities, food) and fixed-percentage withdrawals or withdrawals of investment earnings for discretionary expenses (travel, entertainment).
It's a decision worth making in consultation with a financial professional.
How many years can your portfolio last?
Recipe for retirement readiness
"While the ultimate responsibility to save more is on the savers themselves, companies have a role to play, too," says Mr. Castille. BlackRock is committed to innovation in this respect and has developed tools that can help investors through all courses of the retirement journey.
Speak to your financial professional or learn more about planning for retirement. Planning ahead can help avoid a recipe for financial hardship and ensure your long life is one of financial health and bounty.
Read the entire Winter 2017 edition of BlackRock’s Shareholder Magazine for more investor habits to consider.