How should you take your retirement income or draw down your assets during political global unrest? As financial author and planner Ron Blue likes to remind us, economic uncertainty is, in fact, certain.
Likewise, in the Bible, Solomon received wisdom from God and wrote in Ecclesiastes 11:2: “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”
Jesus, in the gospels, talked about what would happen during the last days, including rumors of war, famine, and other types of challenges currently facing our world today. These things are not new and are unfortunately guaranteed to continue as time marches on.
Inflation Erodes at purchasing power everyday
Right now, we are experiencing a great deal of political unrest and problems here in our own country that we’re forced to deal with on a daily basis—making the future seem very unstable and unpredictable. Inflation, specifically, is a large problem currently affecting retirees. As evidence of this, the Consumer Price index (all items) rose 6.8 percent over the 12 month-period ending in November 2021, representing the largest 12-month increase over a 40-year period. Now, retirees are faced with decisions about how to survive off their hard-earned savings, given rapidly rising living expenses. In this article, we'll discuss three very important keys to enjoying a wise retirement income distribution—a notably important and timely topic, given the current events just mentioned.
By the way, if you’re also looking to protect your wealth and retirement income from inflation watch this free training video here.
What are your expenses?
At the very foundation of this concept, we must of course begin with the amount of money a person currently has, along with their expenses. What you should do while determining your retirement income distribution strategy is to examine your current payments:
- Will you have a mortgage when you're retired?
- Will you have car payments?
- Will you have credit card debt?
- School debt?
- How much will your utilities be?
- Car insurance?
- Homeowner's insurance?
- Medicare or health insurance?
There are also many other fixed expenses to consider as well. You can click on this link to view a suggested budget sheet that might help you determine your own personal expenses during retirement. Once you arrive at this number, you’ll have a distribution target. This, of course, will never be exact, and emergencies will pop up from time to time. As such, you want to account for emergencies and other unplanned expenses during the planning process. In doing so, you’ll actually be able to save some money too during months when you have a surplus—it’s a very conservative goal that can help you not only enjoy a comfortable retirement but not outlive the money you have as well.
Setting a Yearly Budget
When you arrive at your monthly number, you can easily multiply that by 12 to quickly set your yearly budget and know how much to withdraw from investments. Then, take that yearly number and subtract Social Security or any pension or other types income you have coming in—for example, alimony or rental income—and the number you have left is what you’ll divide by your savings or your retirement accounts.
What is a Conservative Withdrawal Rate?
For example, if the number you come up with is $82,000, and you're getting $27,000 from Social Security, subtract 27 from 82 to arrive at $55,000. If you have, let's say, $6,000,000 saved up, you'll take 55,000 and divide it by 6,000,000 to see that your withdrawal rate will be less than 1%, which is good! This is a very strong number because the projected growth of investments (like stocks) will probably do better than 1% a year, even during the 2020s. We project that stocks will probably perform around 3% due to their amazing performance during the 2010s.
Now that you've determined the amount of money you’ll need to distribute from your investments, know that as that rate increases above 3%, you can begin to gauge the importance of needing a portfolio that will either take risks or remain balanced for what you really need. We’ll discuss that more in a minute, but this at least gives you a number you can go by. The lower the figure, the better. One-percent (1%) is a very conservative number and much better than say, 9%, in this case. In this particular scenario, with 55,000 representing less than 1% of 600,000, that's a very strong figure to have. Someone in that situation will be able to live comfortably for a very long time on their income. On the other hand, if you draw up something with, say, a bunch of mortgages for houses you’re not renting out, vacation homes, country club memberships, and international travel plans, and your annual budget lands at $280,000 but you've only got a million dollars, that's a 28% withdrawal rate: a less-than-ideal scenario.
How will your withdrawals be impacted by taxes?
The next key aspect we’ll examine is the tax situation. You really want to go in and study the different brackets, particularly the federal brackets, and how they’ll impact your withdrawals. There's currently a big difference in this respect, as some lower-end brackets are around 10-12% while others fall in the low twenties (around 20-24%), and then those on the high end of the spectrum jump over 30% and in fact rise close to 40%. The disparity between 10% and 37% is obviously huge, so you always want to consider your tax bracket in addition to your withdrawal needs. While doing your tax returns each year, take a look at your taxable income to determine your specific bracket, and hopefully, you'll be able to take out quite a bit from IRAs without making substantial bracket jump.
Given the above, it’s important to understand that there's a low bracket, a medium bracket, and a high bracket. Hence, there are currently two large leaps within the current tax bracket system as we sit here today in 2021.
It's very easy to jump from the lowest bracket to the middle bracket, but it takes a lot more money in retirement to jump from the middle bracket to the top bracket. All you need to do is discern just how close you are to rising into the next bracket. The middle two brackets are currently only 2% apart and thereby not a large jump to be concerned with, but when you move from the high-middle bracket to the low-top bracket, that is in fact a substantial rise of 8% and in turn worthy to note.
You want to look at what you need and how much you will withdraw.
- Can you keep yourself in the lower two brackets?
- If not, how about the middle two brackets?
- How much money should you take from your IRAs, which will count as income?
What Are the best and worst places to get income from in retirement?
Keep in mind that one of the worst places to draw income from during retirement is a traditional IRA. On the flip side, a Roth IRA (or taxable account) represents one of the best places to get income during retirement, merely a savings or brokerage account that you can invest in similar to an IRA. Yet, of course, many people don't have as much money in those types of accounts because during their working years, they didn't face the income tax deduction they would otherwise for a traditional vs. Roth IRA.
While a Roth IRA does not provide the individual with a tax deduction in the year of contribution, it does allow the person to invest his/her money and grow/withdraw it on a tax-free basis. Essentially, you’re setting out to prevent yourself from jumping into the next major bracket, whether that’s from low-to-mid or mid-to-high. You want to use that money, some of which may come from an IRA, Roth IRA or savings account, to maintain your current bracket. This is the next key element in planning your retirement income distribution in the face of inflation and government turmoil: ensuring you keep your taxes down to act as a better steward for your money.
Invest the way King Solomon Did
The final consideration is something we’ve already touched on, which directly relates to the political unrest and other matters currently thrown our way as perhaps the US slowly transitions into socialism. The third element is to have a diversified portfolio. The higher your afore-mentioned number (let's say, for example, you need to withdraw a hefty 6% from your investments each year to enjoy a comfortable lifestyle and cover your pre-planned expenses), the more important it is to understand where the stock market will fall short.
Stock Market Drops And Its Impact
Furthermore, if all of your money is in, say, the US stock market, which goes down 37% (akin to 2008), and you take out 6%, that represents a 43% down year—making it more difficult to recover when you experience these big losses. Adding withdrawals to that, the scenario becomes that much more challenging. Hence, when you set retirement income distributions, ensure you have a well-diversified portfolio so that if and when the stock market does go down quite a bit, you have investments such as rental real estate, treasury bonds and gold that are not highly correlated with the US stock market.
Now, remember that real estate itself is correlated to the stock market. However, if you have rental real estate, you’ll still earn that rental income regardless of US or global stock market performance. Given the current political unrest and uncertainty surrounding the future state of our nation, will we enjoy economic expansion wherein the stock market goes up and we seek to invest, accordingly? Will we experience deflation wherein the unemployment rate goes up, the economy shrinks and investors put their money into US treasuries that rise while stocks go down? Will we see a 2008-like scenario wherein the stock market drops, and gold rises above 5%? Or, perhaps, will we endure stagflation, a situation that was particularly scary for folks back in the late seventies wherein interest rates go up, driving stocks and bonds down? Yet, when his happened back in the 1970s, gold skyrocketed at the same time.
If you need to withdraw a high number from your assets, whether that’s 6%, 7%, 8%, or 9%, it’s that much more important for you to be well-diversified. As you get into the range of 10%, particularly if you're in good health and could live well past 80 years old and in turn withdraw for 20-plus years, you do have an investment horizon that would allow you to put your money into more inflationary asset classes that perform better than treasury bonds: for example, rental real estate, gold and global stocks. These would all help you mitigate the impact of inflation on a long-term basis, which would certainly be a concern in light of withdrawal rate requirements rising above 6%.
For a quick recap, let’s review the three key elements required for successful retirement income distribution amidst the backdrop of political unrest and current national and global challenges. You want to, No. 1, determine your expenses to help you to set a budget. No. 2, know which tax bracket you are in, using money from non-taxable sources to keep from rising into one of the next major brackets. No. 3, have a well-diversified portfolio with non-correlated assets, giving you and your portfolio a better likelihood to survive huge drops within specific asset classes.
Retirement Ready Success Call
Use this link: https://calendly.com/thomascloud/retirement-ready-success-call to set up a no-cost, no-obligation retirement-ready success call, wherein we can chat for 20 minutes or less about where you are now and where you want to be in the future. I will also share some tips I use with my clients who are facing similar challenges to yourself.