One of the challenges of financial planning, specifically retirement income planning, is the fact that the rules continuously change. Taxes laws change with each administration and the Trump tax code was no exception. By now, you're aware of the Secure Act of 2019 and the modifications to your required minimum distribution (RMD) schedule and Roth conversion rules. But wait, there's more. The Cares Act of 2020 gave us new instructions on premature distributions from qualified accounts and suspended RMD's for those who didn't want or need them. And these are but a few examples.
It's like driving down the interstate on your way to your retirement cabin in the mountains. Every mile or so there's a detour sign that Google Maps can't see and the speed limit keeps changing. If your head isn't spinning, you're simply not paying attention.
But these rule changes are mere modifications in comparison to the critical retirement rule change that faces every single retiree every single year without regard to the political or economic landscape. Tragically, most retirees are entering retirement unaware and headed for a potential car crash.
On the road to retirement, you had one goal: Fill up your retirement vehicle with as much money as you possibly could. Some of you have stuffed your Honda Civic full of twenty's, while others have filled a semi full of Benjamin Franklin's. Good for you. The rules to the retirement game start with investing and saving as much money as you possibly can.
There were ups and downs to your balances as they tracked the different markets you were invested in. No matter, time was on your side. Besides, if the markets were down you were simply adding money and dollar cost averaging. Patience, fortitude, asset allocation, diversification and a little bit of luck has got you to the next part of your retirement road trip: living off all the money you've saved.
And that's where the rules changed. No doubt you've read the blog Dangerous Descent into Retirement. If so, you know where I'm going with this. In the accumulation phase of retirement, growing your money was the objective and the rule was to stay the course and be disciplined, allowing time to compound your assets. However, now that you are in the income phase of retirement you have two goals. The first is to grow your money to keep up with inflation. The second is to create an income that will survive market volatility.
I hope that you can see that these are two goals that are diametrically opposed. The reason is that the rules for income are different than the rules for growth. When you are taking income, if your first years are your worst years you can tap into your principle to such a degree that the good years will not be enough to sustain future income. Said another way, when the market is down and you are taking out withdrawals, you are spending the money that can never recover in an up market.
When you were growing or accumulating money, down markets meant you were buying assets on sale. We call this dollar cost averaging. When you are creating income, down markets are detrimental. The evil twin to dollar-cost averaging is known as the Sequence of Returns Risk.
So what is the solution? Stability Planning. We recognize the rules have changed for retirees and we assign your assets to three Pillars. A liquid pillar, an income pillar and a growth pillar. Each Pillar has it's own purpose and it's own set of rules. By doing this, we diversify your risk and help you reach your retirement destination. Each Stability Plan is unique and if you'd like to learn more click here.