“I can’t change the direction of the wind,
but I can adjust my sails to always reach my destination.”
— Jimmy Dean

And so it is with investing during retirement. After serving as a financial adviser for decades, I finally fully retired last year, so I have a somewhat unique and personal perspective on this topic.

It is amazing to see how quickly the focus of investing changes when those paychecks stop. 

The next month, you want to make sure there’s new money in the bank account to meet your spending needs. The focus shifts from growth to income.

But there needs to be some balance in your investment strategy between the two goals, given the impact of inflation during a retirement that could last decades.

Moving into retirement likely suggests the need to “adjust your sails” to reach that “destination” of lifetime financial security.

When clients told us they were planning on retiring (whether partially or fully), we started taking about a “paycheck replacement plan.”

Replacing pre-retirement earnings usually comes from several sources: Social Security, pension benefits, investments and, in some cases, post-retirement work.

Most folks told us they would like to be able to maintain their pre-retirement standard of living, and perhaps add costs for all the travel they had been too busy working to enjoy.

Early “paycheck replacement” planning really paid off in helping provide some peace of mind, given the normal worries that come with a big lifetime change like retirement.

Sounds pretty simple, right? Wrong. There is nothing simple about creating an actual plan to meet retirement spending needs.

Many people worry about having enough money to meet their retirement needs — and about running out of money.

And there are plenty of unknowns that make this planning difficult.

How long will you (and your significant other) live? Will you stay healthy or face serious physical/mental challenges that have an impact on your life plans and living costs?

What kinds of returns will you actually earn on your investments? What about inflation and taxes? And even, what if Social Security or pension benefits don’t actually pay as much as promised?

All of this calls for thoughtful planning and regular reviews to adjust for change.

One big question is how much can be withdrawn from an investment portfolio and have a fairly high chance of not running out of money during your lifetime.

Running out of money is truly one of the biggest fears of retirees, yet it seems wise to acknowledge that there really are few guarantees (other than the proverbial death and taxes), so folks need to get comfortable with looking at ranges of long-term outcomes.

Better planning software will factor in inflation, tax and life expectancy assumptions. These more sophisticated planning tools can be used to compare spending targets to income sources.

They also can “stress-test” projections using “Monte Carlo” simulations that show a range of outcomes under a variety of both favorable and unfavorable futures.

This planning approach can be used to explore how different (i.e., more aggressive or more conservative) investment strategies support long-term spending needs.

Each of us can decide what is an acceptable level of risk under these scenarios. Some people might feel uncomfortable with even a 10% chance of running out of money while others with just a 30% chance of success might argue “at least there’s a chance!”

But what if you don’t have access to these kinds of planning tools, or just don’t want to spend the time or money for them?

This is where some basic strategies and rules of thumb can come in handy. Here are a few:

Investment Mix

There is an old rule of thumb that even the late Vanguard founder Jack Bogle shared: the percentage of bonds in your portfolio should be equal to your age, with the rest in stocks.

Pretty simple. Your portfolio starts off more aggressive when you’re young and consistently becomes more conservative with a greater focus on income and safety as you get older.

With medical advances extending life expectancy, some have argued for a somewhat less conservative approach that would adjust the bond portion by offsetting your age by 10 or even 20 years.

In this case, a 70-year-old might have 40%-50% in stocks rather than just 30% under the traditional rule of thumb.

Many mutual fund companies offer “target-date” funds that employ this concept by systematically becoming more conservative over time.

4% Spending Rule

This rule of thumb suggests that a retiree withdraw 4% of the balance in their retirement account(s) in the first year, and then take out that dollar amount, adjusted for inflation, every year thereafter.

For example, if you have a $1 million retirement account, you would withdraw $40,000 the first year and then adjust this amount by the prior year’s inflation in each subsequent year. 

According to Investopedia, the 4% rule is intended to supply a steady stream of income while maintaining a sufficient account balance for the future. The rule was created using historical return data for stocks and bonds for the 50 years from 1926 to 1976, and argues that savings would last for about 30 years.

Some planners argue that a 3% withdrawal rate is safer, given the lower current interest rate environment and longer lifespans, while others think 5% would work better for all but “worst-case scenarios.”

According to a 2021 Morningstar study, “3.3% is the new 4%.” And note that, while simple, an individual’s life expectancy plays an important role in determining whether the withdrawal rate is sustainable, especially given the fact that medical and long-term care costs can increase with age.

Dynamic Spending Rule

Developed by Vanguard researchers, the dynamic spending rule allows investors to spend more when markets perform well and reduce spending when markets perform poorly.

It modifies the 4% spending rule by establishing a 5% spending ceiling and a -1.5% spending floor.

Using a $1 million retirement account beginning balance, the first-year withdrawal would still be $40,000.

If the market was up 10%, you would take the $40,000 plus an extra 5% for a total withdrawal of $42,000.

If the market lost 10%, you’d take the $40,000 minus 1.5% for a $39,400 withdrawal.

This slightly more complex approach would increase portfolio longevity, something that could be important with medical advances extending life expectancy.

Annuities

A single premium immediate annuity (SPIA) converts a lump sum of money into a steady income.

The most common SPIA contracts guarantee monthly income for the annuitant’s life, some for the life of both annuitant and spouse.

A few offer some sort of benefit increases to help offset the impact of inflation.

And there are variable SPIAs in which payouts are guaranteed for life, but the amount of each monthly benefit depends on returns of the underlying investment funds selected.

The primary benefit of SPIAs is the elimination of longevity risk — but there are significant trade-offs for this benefit, including lack of flexibility to meet changing needs and the dwindling real value of fixed benefits impacted by inflation.

For these reasons, many advisers urge caution when considering these products. And given that a guarantee is only as good as the company making it, do your research into an issuing company’s history, financial ratings and reputation.

Regardless of what approach you decide to take, the fact that life changes would argue for periodic reviews.

As Jimmy Dean noted, you can’t control the wind, but you can always adjust your sails. These kinds of “midcourse corrections” are essential to staying on course.

Here’s wishing you safe sailing as you plan for a secure and comfortable retirement.