Golden Opportunities

While you were working, your goal was to save money. At retirement, the focus is on maintaining your lifestyle while not outliving your income. How do you shift your financial plan? Here to discuss the importance of a "distribution planner" for your financial future is Jonathan Herbruck, owner and president of Concord Advisors.

Question: We thought we were on the ball if we had a financial planner. Now you're here to say that at our age we need a "distribution planner". What's the difference?

Answer: To understand what a distribution planner is, it is best to understand the two phases of retirement planning first. There is the accumulation phase, and then later comes the distribution phase.
The accumulation phase is when you are actively saving money for retirement or a specific goal. Your investment objective is normally to grow the money and take risks to get a higher return than you could find in your bank. Many if not most investment or financial advisors specialize in the accumulation phase.
The distribution phase is quite different in that the primary goal is "I need income to support my retirement lifestyle". Distribution planners specialize in the process of planning your retirement spending. We help people who want to conserve what they have saved while taking distributions and keeping up with inflation.

Question: What do you see as the greatest concern for those entering the "distribution phase"?

Answer: The most common question we get asked is "Will I outlive my retirement income?" People want to know if their money will last until both they and their spouse die. Of the people I talk to, 60% to 80% of those who are already retired ask the question "will I run out of money?" It's a question you should ask when you're planning to retire, if possible.

Question: How does a specialist in distribution planning answer that question? Do they have a special financial crystal ball?

Answer: The distribution planner is going to take into account all the factors that could affect your portfolio during retirement, like inflation, risk of a bad market, and cash flow requirements to fund a lifestyle. The accumulation specialist normally spends their time discussing an average annual return for the portfolio with a best guess as to how much the retiree can spend based an investment return.

Question: So if an accumulation specialist talks about estimating average return, what numbers does a distribution planner talk about?

Answer: A distribution planner is going to talk about a distribution rate. This is a percentage of the portfolio you can take each year. There have been several studies done in this area, which back test how much a retiree can safely take from their portfolio while also taking into account several other factors and asset allocation.
There is also software that will test your retirement plan. It will test your plan if you invest at a bad time and the market goes down more than one year consecutively. It will also test your odds of winning.

Question: Where does a distribution planner begin?

Answer: We start with lifestyle. Often, people just want to know what they can spend, but what is the reality of that if it won't support their lifestyle? If people don't have enough to support their lifestyle in retirement, they are either miserable because they aren't living like they wanted to, or they don't change their lifestyle and run out of money.

Question: What do you do if you see a client spending too much money from their portfolio?

Answer: Obviously, you are allowed to spend your own money, but this is something we would discuss. We don't want a client to run out of money.
We will determine what the distribution rate is and what was agreed upon in their investment policy statement. If the client continues to spend more money than the recommended amount, we will send them a letter describing how long we expect the money to last.

Making sure your retirement spending is properly planned is complicated. That's why we're inviting Jonathan back in a few weeks, for more information. Until then, give Concord Advisors a call if you have any questions, or if you'd like a free fact sheet.