30 years ago, Americans had pensions and Social Security to guarantee their retirement spending needs, and life expectancies were lower. Now, retirees must plan to live up to 30 years into retirement and generally have no pension, creating a much more complex retirement planning situation.
LiveWell Capital has created a list of 5 principles to ensure that clients get the most from their retirement assets.
2 years of annual spending need in cash. Keeping two years of annual spending in cash is beneficial for catering to needs beyond what Social Security and other income streams provide.
A properly allocated portfolio will keep 6-8 years of the spending need in bonds and is allocated with a preference for smooth and predictable – This is preferred over chasing the highest possible return. A typical retirement portfolio, for someone who is drawing 4%, will have 60% diversified stocks, 32% diversified bonds, and 8% cash.
Never sell equities in a down market. This is made possible by principles 1 and 2 above. “Never” is a strong word and there are many wise exceptions like rebalancing, tax loss harvesting, or repositioning within equities.
Disciplined Spending. LiveWell Capital recommends the following spending rules of thumb:
a. Percentage Spending – In general, LiveWell Capital says that clients retiring in their 50s can spend 3-4.5% and clients retiring in their 60s can spend 4-5.5% of their total portfolio. For example, a client with $2 million who is targeting 4% could spend $80,000 per year. The upper ends of these spending rates are possible because of the potential adjustments discussed below.
b. Cost of Living Adjustments – Most clients would rather spend more money earlier in retirement when they are healthy and active. One way to spend more money earlier is to personally absorb some of the inflation impact each year. We recommend taking a cost of living adjustment every other year rather than every year.
c. Spending adjustments in difficult markets – LiveWell Capital recommends adjusting down spending by 5-10% in a sustained bear market. (Down more than 20% for more than 12 months)
Taxes matter and should be managed. These strategies can minimize tax liability:
a. Bracket Maximization – Use tax brackets to the best advantage each year. Roth conversions in the bottom brackets or gain harvesting in the 0% capital gains bracket are solid strategies.
b. Tax Loss Harvesting – Just as people replace their smoke detector’s battery when it gets low, asset classes that have declined are like that dead battery. Changing them out provides overall protection in the asset class, and the loss offsets the gains.
c. Asset Location – Looking to where an investment’s return is likely to come from and properly matching assets to accounts can help lower tax liability.
d. Opportunistic Roth Conversions – Conversions can be especially effective at helping to avoid large Required minimum Distributions from the Traditional IRA. Converting during a market correction, when the market is down, means less taxes paid.
Learn more at https://www.livewellcapital.com/.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Diversification and strategic asset allocation do not assure profit or protect against loss. Northwestern Mutual and its Financial Representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent tax advisor.
LiveWell Capital as a marketing name for doing business as representatives of Northwestern Mutual. LiveWell Capital is not a registered investment adviser, broker-dealer, insurance agency or federal savings bank. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) and its subsidiaries. Investment advisory services provided as an Advisor of Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI, a subsidiary of NM and federal savings bank. Investment brokerage services provided as Registered Representatives of Northwestern Mutual Investment Services, LLC (NMIS), a subsidiary of NM, registered investment adviser, broker-dealer and member FINRA and SIPC.