What Changes When Your Paycheck Stops? Why adding certainty may be just as important as pursuing investment returns.
By Brian Wheeler, Director of Wealth Management & Business BrokerageÂ
Let’s talk about something I don’t think gets nearly enough attention when people are preparing for retirement.
When Your Investments Become Your Paycheck
For most of our working lives, we have something we probably take for granted—a paycheck. Every couple of weeks, money shows up. We pay the bills, enjoy life, save for retirement and invest what we can.
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Then one day the paycheck stops, and the money we spent 30 or 40 years accumulating suddenly has a different job. Now it must become the paycheck.
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Think about what that means. While you’re working, a 20% market decline certainly doesn’t feel good, but you still have income coming in. Now imagine that same decline six months after you retire, when you may need to sell those investments to pay the bills.
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Those dollars are gone. They aren’t there to participate when the market eventually recovers.
The Risk of Retiring Into a Down Market
This is called sequence-of-returns risk, and retirement-income researcher Wade Pfau has spent years studying it. But the interesting part isn’t simply understanding the risk. It’s what we might be able to do about it.
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What if reducing retirement risk doesn’t mean making your entire portfolio more conservative?
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What if instead we identify the income you absolutely need and create more certainty around that part of your life?
Creating More Certainty Around Retirement Income
Social Security may provide some of it. Cash and high-quality fixed income might provide another layer. For the right person, guaranteed lifetime income from an annuity may play a role. Properly structured cash-value life insurance can potentially provide another source of money with different market and tax characteristics.
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The objective isn’t necessarily to replace your investment portfolio. It may be to take some of the pressure off it.
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If your lifestyle isn’t entirely dependent on selling stocks every month, what happens when the market falls 20%?
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Maybe you don’t have to sell. And you’ve just given the long-term portion of your portfolio something incredibly valuable: time to recover.
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That’s the part I think many people miss. Adding certainty to one part of your financial life may actually allow you to be more comfortable taking appropriate investment risk with another.
Why This Matters for Business Owners
For business owners, this can be especially important. You may have spent decades with your income, net worth and financial security tied largely to one company. Then you sell the business and suddenly have several million dollars to invest.
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You’ve diversified the asset. But have you actually created financial security?
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Maybe some of that money needs to provide income next year. Some needs to grow for another 20 years. Some is there for emergencies, and some may ultimately be intended for your children or grandchildren.
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If every dollar doesn’t have the same job, why should every dollar take the same risk?
Planning Beyond Accumulation
If you’re within five or ten years of retirement—or getting closer to selling a business—I wouldn’t only ask whether you’ve accumulated enough.
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I’d ask:
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How much of your future do you want dependent on what the markets happen to do next?
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There isn’t one right answer, and these strategies aren’t appropriate for everyone. But there are ways to create more certainty, address longevity risk, improve tax diversification and reduce the need to sell investments at exactly the wrong time.
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Those are conversations worth having before the paycheck stops. Because retirement planning isn’t simply about how much you’ve accumulated.
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It’s about turning what you’ve accumulated into a life you can confidently live.
