The key to a successful retirement income strategy isn’t accumulation, but how (and how fast) the dollars are spent. 401(k) adviors get it, but participants have a long way to go.
“For many retirement-oriented investors, developing and overseeing a retirement spending strategy can be a complex undertaking, further complicated by increasing life expectancies, disappearing sources of guaranteed income, and historically low yields on bonds,” according to Vanguard.
In a new paper from the Valley Forge, Pennsylvania-based investment behemoth, “From assets to income: A goals-based approach to retirement spending,” researchers provide a framework to help 401(k) advisors and investors turn an investment portfolio into a sustainable and consistent source of income.
The approach has three components:
• Developing a prudent spending rule. Vanguard researchers advocate for tailoring spending to a retiree’s unique goals using a “dynamic spending” rule under which annual spending is allowed to fluctuate based on market performance, but “smoothed” by applying an annual ceiling and floor to the amount.
• Maintaining a broadly diversified retirement portfolio. Vanguard researchers recommend building a balanced, diversified investment portfolio that focuses on total return rather than income.
• Implementing tax-efficient withdrawal strategies. With many investors holding taxable, tax- deferred, and tax-free accounts, Vanguard researchers suggest a withdrawal order strategy designed to minimize taxes, as well as to potentially increase the spending amount and a portfolio’s longevity.
“Each step involves complexities and trade-offs,” the paper concludes. “The stakes are high, and the impact of sub-par decisions can be severe. This combination of complexity and consequence underscores the need for skillful guidance, giving advisors an opportunity to have a profound impact on the financial well-being of their clients.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 401(k) Specialist and Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots. Experienced financial services content executive specializing in creative new media delivery. He joined the American Retirement Association in 2023 as Chief Content Officer, overseeing communications for the organization, as well as its sister organizations.
