Employing an Active Wealth Strategy for Retirement

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When investors save for retirement, they often make contributions and investment decisions based on saving to a certain level they think will be sufficient to support their desired lifestyle over a set period of time. As they approach retirement, they often re-evaluate their situation and may adjust their spending levels at the onset to make certain they can meet future expense targets. Some may incorporate extraordinary expenses for travel, vacation homes and luxury items into the mix, as well as factor in wealth transfer and charitable giving into their plan.

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Regardless of how targets are established or how carefully you budget, the initial plan may end up being unsustainable later in retirement, and many retirees are not equipped to make meaningful adjustments once the situation changes.

An active wealth strategy addressing five key interrelated areas (Invest, Spend, Borrow, Manage and Protect) can help ensure investors make better decisions as they look more broadly at each significant variable when making their financial decisions.

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Invest

Investing is often regarded as the key element for a successful retirement. However, investing should be considered among several other variables as investment choices need to be integrated with other decisions to ensure success.

An active wealth framework may involve reviewing investment allocation or location (whether investments are positioned in taxable or tax-deferred accounts), spending levels, managing taxes, borrowing and asset protection strategies. To use these fundamental areas to further evaluate retirement decisions, you may need to review your anticipated investment and retirement income, retirement duration, estimated withdrawals for all expenses, managing liquidity for tax payments and asset protection for contingencies such as medical or long-term care.

Evaluating these variables may highlight areas for improvement and alternate strategies. For example, if you can’t keep up with your desired expenses on your existing savings, you may need to delay retirement or look for a palatable way to increase your income through a lucrative hobby or other business activity.

Spend

Though spending goals are also highlighted as one of the main drivers of retirement, don’t expect to be able to determine how much you’re going to need to spend at the onset of retirement without reviewing the situation and tweaking your plan periodically. Regardless of what portion of spending can be covered through current income from other sources, some retirees lock onto a retirement drawdown goal, and distribute a fixed percentage from their retirement portfolio to cover expenses.

The “4% Rule” has been a traditional gauge for retirement success, and those employing the strategy often use it as a rule of thumb, expecting that assets would likely be preserved over the course of retirement when withdrawals hover around 4% of the portfolio. Trusting that 4% portfolio withdrawal decision can be alluring, but it can also be dangerous. Retirees need to be able to adapt drawdowns to address fluctuating market values. Those who try to manage the distributions using percentage-based withdrawals often find it unsustainable over the long-term, perhaps withdrawing too much in good years and finding themselves unable to cut back later.

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Other variables, such as interest rates, can interfere with percentage-based distributions. Many retirees change their asset allocation in retirement, shifting assets away from equities to fixed income to lower overall portfolio risk. But in today’s low interest rate environment, lower bond yields can interfere with the ability of a portfolio to deliver suitable returns to cover expenses, especially using a 4% target.

Periods of market volatility can also disrupt planning for retirement, and many retirees learn quickly that they cannot always rein-in expenses in a prolonged market decline.

An active wealth review considers expenses that cannot be so easily controlled. Expenses such as income taxes may increase in retirement, especially when distributions are being taken from tax-deferred retirement plans or traditional IRAs. Retirees who have no plan for managing those taxes can run into trouble if they haven’t accounted for those tax increases or planned for taxable v. tax-deferred portfolio withdrawals. Similarly, medical and long-term care expenses can occur unexpectedly and generally cannot be contained within predetermined levels.

An active wealth strategy will look at asset protection planning to provide adequate health and/or long-term care insurance to help minimize exposure to extraordinary expenses that may result in the portfolio being unable to recover from very large or ill-timed expenses.

Borrow

Borrowing strategies and managing use of leverage do not necessarily end when someone enters retirement. To address market volatility in retirement and spending, an active wealth plan may incorporate a prudent borrowing strategy using an investment credit line or other credit facility. The current low interest rate environment has created a compelling opportunity to borrow to cover current outflows without disrupting prudent long-term investments. Borrowing is particularly useful to address short-term liquidity, such as providing periodic payment of income taxes or funding extraordinary purchases. It may allow investors to avoid selling assets in down markets and dovetails with efforts to manage overall capital gains income/taxes when liquidating appreciated assets.

Retirees need to be cautious with debt, and any borrowing strategy should be accompanied by a prudent repayment plan that addresses their ability to pay down debt quickly if rates increase to the point where risk/reward no longer warrants the use of leverage.

The above strategies are some representative examples of how an active wealth framework can help retirees address issues beyond determination of their retirement spending level. They are not limited to solutions discussed in this article. The active wealth framework highlights considerations that compel investors to focus on broader issues and interrelated outcomes for each fundamental area: Invest, Spend, Borrow, Manage and Protect. Analyzing each of these variables can help retirees appreciate all the consequences of their financial decisions, become aware of new opportunities, and allow retirees to make informed, successful maneuvers over the course of their retirement.

Curious how your financial plan measures up on the five practices of active wealth management? BNY Mellon Wealth Management recently launched its Active Wealth Accelerator, a new assessment tool that offers an interactive experience for people to understand how they rate and to optimize their wealth strategy and have productive conversations with their wealth advisers.

Disclaimer

The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

Disclaimer

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As a Senior Wealth Strategist with BNY Mellon Wealth Management, Kathleen Stewart works closely with wealthy families and their advisers to provide comprehensive wealth planning services. Kathleen focuses on complex financial and estate planning issues impacting wealthy families, key corporate executives and business owners.