Too Much Risk Can Ruin Your Retirement

Too Much Risk Can Ruin Your Retirement

March 15, 2024

Retirement is a major life event many people eagerly anticipate. It’s a time of life that promises the chance to take a break from the daily routine, savor more leisure time, and embrace your personal freedom. Yet, to fully transition into this new phase, it’s vital to have a robust plan in place for generating retirement income. What strategy will you create to feel confident you have enough to support yourself over the next 20 to 30 years in retirement?

Crafting a retirement income plan is a big shift away from your routine of contributing to retirement accounts during your working years. It involves a fresh set of things to consider, both technically and emotionally. Whether you’re in the early stages of retirement planning or already enjoying your golden years, this article offers new insights to help you navigate this truly exciting phase of life.

Safe Withdrawal Rate Is More Important Than Rate of Return

When it comes to retirement planning, many people focus solely on the rate of return they can expect from their investments. However, what is often overlooked is the amount you will be withdrawing from your retirement fund each year. This is where the concept of a safe withdrawal rate comes in. How much can you withdraw from your accounts without risking running out of money later on in life? 

The most commonly cited safe withdrawal rate is the 4% rule, which is the theory about how much you can safely withdraw from your retirement accounts each year without running out of money. The 4% rule became widely publicized after Bill Bengen’s research in 1994, which showed that withdrawing up to 4% of retirement assets, and then adjusting annually for inflation, could sustain the typical 30-year retirement going back to 1926. 

On the surface, it may seem like withdrawing 4% is the way to go. After all, the data goes back nearly 100 years! However, it is important to keep in mind that the safe withdrawal rate is just a guideline and should be adjusted according to your personal financial situation and goals. As an example, if you retire early and are not yet collecting your Social Security benefit, you may need to withdraw more than 4% from your retirement accounts for a short period of time to make up for this difference, knowing that you will later be able to reduce withdrawals once those benefits have begun. Nevertheless, when you reach retirement and start taking an income from your portfolio, the amount you withdraw from your retirement fund each year could be far more important than the rate of return you receive and should be your major focus.

Diversification Is Key

Diversification is a critical aspect of a successful retirement strategy. When you’re working, it’s common for people to have a fairly aggressive investment approach with 100% stocks as they’re accumulating assets and seeking more growth. However, when you reach retirement, you likely shouldn’t keep the same investments you’ve had over the last few decades. As we saw during the tech bubble in the early 2000s, the Great Recession in 2007-2009, and the first few months of COVID-19 in 2020, the stock market can drop 30% to 50%, and sometimes it can happen quickly. 

What would your income in retirement look like if you were dependent on a portfolio that was 100% in stocks? Situations like those are why we want to have diversification in your investment portfolio. We want to have other assets, besides stocks, that shouldn’t fall nearly as much in a downturn so that if you need income, we can generate it from those assets while we wait for your stock portfolio to recover. In addition, diversification can help to level out the highs and lows of investing, hopefully giving you more comfort and confidence to stay the course with your investment and income strategy.

The Emotional Element of Retirement Withdrawals vs. Contributions While Working

Accumulating assets for retirement is often driven by a sense of hope and optimism that you’re working toward a great goal and contributing to it every two weeks. However, drawing down your accounts in retirement often brings a completely different emotional experience with heightened anxiety and a fear of loss. In addition, any potential losses feel like a bigger deal since this is the only pot of money you have, and you don’t want to be forced to go back to work because it’s fallen too much. 

To mitigate this emotional stress, it’s not only important to stay within a safe withdrawal rate range (which can be easier said than done); it’s also critical to have the support of a good financial advisor who can provide the technical guidance you need, as well as emotional support and encouragement to stick with the plan. In collaboration with your financial advisor, you can make informed decisions during periods of market turbulence that will help you stay focused on your financial goals.

Are You Taking On Too Much Risk?

Balancing retirement distributions involves navigating both technical and emotional aspects, which can make this a complex process. Are you feeling uncertain or overwhelmed about how to allocate your portfolio? Or are you unsure about the level of risk you’re taking? Our team at Center for Wealth Management is here to assist you. Contact us today to schedule a free introductory meeting online, call (248) 220-4321, or email me at justin@cwmfinancial.net.

About Justin

Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial confidence. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER™ practitioner. 

Outside of work, Justin enjoys spending time with his family. He and his wife, Corinne, have five children between them ranging in age from sixteen to twenty years old. Justin lost his first wife, Heather, to brain cancer in 2020, and thus has experienced firsthand the emotional, mental, and financial challenges spouses and children go through when dealing with such a tragic situation. Outside of work, Justin enjoys coaching or attending baseball, softball, powerlifting, and basketball events, traveling to new locations, and spending time at the family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.