How to Develop a ‘Smart’ Retirement Spending Strategy

How to do you get a handle on your clients' spending plans?

How to do you get a handle on your clients' spending plans?

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.”

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