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Congrats! You're About to Retire…Are You and Your Portfolio Ready?

Have you truly prepared yourself financially—and mentally—for the transition from accumulation to distribution?

Presented by Allegiant Private Advisors February 18, 2020

Work hard, save money and you'll be able to retire someday. Most everyone has heard iterations of this statement over the years, but have you ever taken a moment to think about it?  Have you prepared yourself financially—and mentally—for the transition from accumulation to distribution? What impact will retirement have on your investment portfolio?

You started saving for retirement a long time ago and have watched your investment accounts grow over the years. There were some years where performance was great, some years not so much. The good news about those bad years was that you just kept adding money and retirement wasn't imminent. Those bad market years were great buying opportunities for you and your family to invest more at better (lower) prices. 

Although buying investments “on sale” is more emotionally difficult than buying material things on sale, it is an important part of the accumulation phase. Continually adding to your portfolio during these times has immense positive impacts on your financial success over the long term. What you may not realize is the actions you take when stocks are “on sale” during the distribution (retirement) phase can have an even greater impact on your success. As Director of Financial Planning at Allegiant Private Advisors, I have the privilege of helping guide clients to their retirement goals and working together as their financial plan evolves.

Carl A. Watkins, CFP®, CDFA™, AIF®, is a Principal and Director of Financial Planning at Allegiant Private Advisors. 

Let’s say you’re preparing to retire. As you transition away from a traditional paycheck you will now use your portfolio as an income stream rather than contributing to it. What does that look like?  Most people flip the retirement switch but continue with the same investment strategy as during the accumulation years. Often this is a mistake.  Your portfolio is going to perform very differently when you’re withdrawing money.  Whether the market is up or down, now you will be withdrawing money by selling shares. Those same “sale” prices now work against you.  (This will also have significant impacts on your tax returns because of the additional taxes that come with qualified withdrawals.) 

Portfolio returns during retirement tend to be less than during the accumulation (working years) phase—but that isn’t always the case.  Managing portfolio withdrawals properly by withdrawing only the dividends and interest, and not selling shares to generate cash, is a great long-term strategy for a successful retirement portfolio.

However, this isn’t always possible, especially with interest rates so low. For those taking distributions higher than the portfolio’s income stream, Allegiant Private Advisors recommends maintaining an additional cash buffer. This strategy prevents selling shares when, not if, recessions roll around and markets decline.  Maintaining this discipline gives retirees confidence when markets are down.  In short, we believe positioning the portfolio to generate enough interest and dividends to maintain your lifestyle, coupled with a cash buffer, is the more sustainable approach than relying on capital gains to fund your retirement paycheck.

Retirement is supposed to be a new and exciting time. If managed properly it can be just that. Planning for the transition—both financially and emotionally—with your advisor or thinking partner can increase your chances of success. This means making sure that your portfolio is allocated properly, and you are setting reasonable expectations for portfolio returns.

It also means preparing emotionally for the transition. Withdrawing money from the portfolio sounds easy in theory, but your whole life you operated with a different mentality – save money, build wealth. This transition to withdrawing money is emotionally hard. The advisors at Allegiant Private Advisors routinely guide clients through this transition. Having a well-defined (and understood) plan is an essential part. It allows you to stick with your long-term strategy when markets are down.

Along with living off dividends and interest and maintaining a cash bucket in your portfolio, there are many other tips and best practices to help you during this transition so that you and your portfolio can survive and thrive during your next phase. As an independent fiduciary advisor, the Allegiant Private Advisors team is prepared to help you navigate the transition from accumulation to distribution to help you make the most of your portfolio, and more importantly, your retirement years.

Allegiant Private Advisors is located at 240 South Pineapple Ave., Suite 200, Sarasota, FL 34236. For more information, call 941-365-3745 or visit allegiantpa.com. Advisory Services offered through Commonwealth Financial Network, a Registered Investment Adviser.