Our Approach to Retirement Income Planning Once You Have Achieved Financial Independence
By Washington Wealth Advisors CFP® Team
You’ve worked long and hard, saved and invested diligently, and finally made it to your golden years. Your discipline has paid off and now you can comfortably pivot to new adventures. You have achieved your Financial Independence!
While this is a joyous time of hard-earned relaxation and exciting undertakings, it is also a completely new season. For decades you’ve been managing your finances one way, and now all of a sudden it changes. You always paid your bills from your paycheck, but now you have no paycheck. What do you do? Where should you pull the money from?
Handling finances in retirement can be confusing and intimidating because it is a completely new way of living that you have never experienced before. There are a number of different ways to meet your financial obligations given your new state of financial independence - all with advantages and disadvantages. Let’s look at our approach to retirement income planning with a combination of the following:
Dividends are the profits that a company passes on to its shareholders, the people that own its stock. Most of the time they are paid regularly, on a quarterly basis. Often, dividends grow year over year, which provides greater protection from the negative effects of inflation.
Dividends are a great source of retirement income because they provide a steady cash inflow. When the stock market is moving up and down, it is nice to be able to focus on the stable dividend you are receiving as opposed to the value of your stock as it changes every day. Even when the stock market is in a decline and your portfolio may be losing value, you will still receive regular corporate dividends to cover your everyday expenses.
Interest is what others pay you in exchange for the use of your money. You can earn interest on everything from savings accounts and CDs to bonds and single-payment fixed annuities. Interest is an excellent part of a retirement plan because it provides a steady income with little to no risk as they are FDIC insured.
Single-payment fixed annuities (SPFA) are another great source of interest income. SPFAs work much like CDs where they provide a guaranteed, fixed rate of return for a specific period of time. The difference is that CDs are guaranteed by the FDIC while SPFAs are guaranteed by the insurance companies that sell them. They provide respite from concerns about the stock market since the rate of return does not fluctuate.
While dividends and interest are independent of the stock market, that doesn’t mean that the market can’t play an important role in your retirement income strategy. It can—in the form of capital gains.
Capital gains are the difference between what you paid for a stock, mutual fund, or ETF and what you sell it for. This past decade has been the longest bull market in recent history, so our clients still have a lot of capital gains to cash in on. Even with dips and recessions, the stock market continues to trend positive over time, so capital gains are a viable part of a solid retirement income strategy.
All of the sources of income discussed thus far have been money generated by your retirement savings and not your savings itself. While it’s nice to be able to generate an income stream from the money that you worked so hard to save, that doesn’t mean you can’t use the money itself - the principal.
You didn’t only work hard and save so that your children and grandchildren could spend it. You can reap your own rewards by spending it too! The only caveat is that you have to be careful not to spend too much and run out of money before you run out of life. An ongoing financial plan can help determine an appropriate withdrawal strategy and withdrawal rate to ensure you have are not withdrawing too much of your portfolio over time.
We at Washington Wealth Advisors do a careful analysis with our clients to determine how much of their principal they can reasonably spend without worrying about running out of money. We are our client’s trusted partner and routinely check in to ensure all is on track and adjust where necessary. Things always come up in life, even during your financial independence period of life. As such, we stay abreast of changes and make adjustments to our clients’ retirement strategies as needed in order to avoid unpleasant surprises.
If you are nearing retirement – your financial independence – and would like an experienced guide to help you navigate the uncharted territory of retirement income management, we can help. Call our office at 703.584.2700 or email firstname.lastname@example.org, or book an appointment online with us. We are here to help!
Important WASHINGTON WEALTH ADVISORS DISCLOSURES Information
Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our unbiased advice, independent approach, and proactive investment management help to support our clients’ overall financial peace of mind.