Too Much Risk Can Ruin Your Retirement!

By Net Worth Advisory Group 

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Retirement marks a significant transition in life, offering the promise of more leisure time and the freedom to pursue personal passions. However, to truly savor this new chapter, you want a well-thought-out plan for how you will generate retirement income. Have you thought about how you will have enough funds to sustain your lifestyle for potentially 20 to 30 years?

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Unlike the accumulation phase during your working years, distributing retirement income requires a fresh perspective and different considerations. Whether you’re at the early stages of retirement planning or already enjoying retirement, this article offers practical insights and support to help you mitigate retirement risk while navigating this important phase of life with confidence and clarity.

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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 portfolio 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? 

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The most commonly cited safe withdrawal rate is the 4% rule, which is the theory about how much money 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 all the way back to 1926. 

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On the surface, it may seem like withdrawing 4% is definitely the way to go. After all, the data goes back nearly 100 years! But 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. Nevertheless, when you reach retirement and start taking an income from your portfolio, the amount you withdraw from your retirement portfolio each year should be more important than the rate of return you receive. 

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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. But when you reach retirement, you shouldn’t keep the same investments you’ve had 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 do that quickly. 

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What would your income in retirement look like if you were dependent on a portfolio that was 100% in stocks? 

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Situations like those are why we want to have diversification in your investment portfolio. We want to have other assets, besides stocks, that don’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.

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In addition, this diversification can level out the highs and lows of investing, hopefully giving you more comfort and confidence in your investment and income strategy.

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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. But 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 may be 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. 

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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.

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Evaluate the Ideal Amount of Risk

Of course, navigating retirement distributions can be daunting, especially when you think about all the factors at play. From tax implications to investment risk, it’s important to approach this phase with a comprehensive strategy. If you find yourself feeling overwhelmed or unsure on how to manage these complexities, know that you’re not alone. Our team at Net Worth Advisory Group works to guide our clients through the intricacies of retirement planning to mitigate your risk while offering personalized solutions tailored to your unique circumstances.

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Take the first step toward a more stable retirement by calling us at 801-566-6639 or schedule a complimentary, no-obligation consultation to see if we are a good fit to help you pursue your goals. 

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To learn more, visit our website.

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About Net Worth Advisory Group

Founded in 2003, Net Worth Advisory Group is an independent, fee-only, CERTIFIED FINANCIAL PLANNER™ and investment advisory firm located in Salt Lake City, Utah. We specialize in helping people transition from the workplace into retirement and ensuring that those who are already retired will not outlive their nest egg. Our top priority is to have clients experience a greater sense of ease with diligent, personalized wealth care and the implementation of customized financial plans and ongoing personalized asset management. We equip all clients with a comprehensive financial plan, meeting every six months to update as needed and review investment performance. Our team is passionate about providing comprehensive financial planning with the fee-only model, and we love feeling like we’re making a difference in our clients’ financial lives.

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As a NAPFA-registered fee-only advisory firm, our recommendations are untainted by a hidden agenda to sell financial products paying large commissions. Unlike our competitors at brokerage firms, insurance companies, and banks, we are compensated solely by our clients, so we are financially motivated to provide objective advice that is always in our clients’ best interests. Anyone can call himself or herself a financial planner, but only an advisor with the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation has met the education, examination, experience, and ethical requirements mandated by the CFP® board. According to the CFP Board, there are 97,000+ CFP® professionals in 2023, representing about 1 in 3 financial advisors in the U.S. Net Worth advisors are also members of NAPFA, which only has about 4,600 advisors, and are either CFP® professionals or CFP® professionals in training.

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Net Worth Advisory Group’s mission is to significantly improve the lives of our clients by delivering exemplary financial planning and wealth management advice that enables them to live the lives they have imagined.