Giveth and Taketh Away: Wealth Planning

By Erin Carper, CFP®

 

For years we go to work and for several reasons; to financially support ourselves, our family, to be fruitful with our educated minds in our desired field, to make a mark on the world and build wealth.  Truthfully, to build sufficient wealth offering a choice in our future between work or play or both work and play.

 

Dr. Ken Dychtwald, considered to be an expert in the area of aging, conducted a study interviewing retirees age 60 and above asking what variables mattered most to being happy and content in retirement.  Health?  That was my guess, but no.  Actually, #1 was how much planning had they done.  How much thought they had given to what they were going to do and what their life was going to look like.  A high correlation was found between how much money retirees had and how much planning they had done. 

 

Accumulation years are your nest egg savings years when you are effectively gathering and growing for a future need.  Your investment decisions during this period often revolve around a mix of investments, feeling more confident about market risk, saving on a regular basis, and saving a percentage based on your earnings.  Also, investing on a regular, ongoing basis can help to remove the emotion that may lead to negative investment decisions, in turn increasing your chance of saving more.

 

When you are ready for your accumulated wealth to bring you financial freedom this changes the purpose and a new investment mindset needs to take place.  These are your taketh or withdrawal years.  Controlling volatility and having a specific withdrawal plan is as vital as was your accumulation investment plan.  This distribution plan can mean the difference in how long your wealth will last and how much you can withdrawal periodically to live on.

 

This reversal from ‘giveth’ to ‘taketh’, can also have the reversing effect on your withdrawal years.   Liquidating during volatile markets may work against your wealth, shrinking the amount that you are distributing, as well as the amount that you have left.  Potentially causing a negative impact as your retirement continues. 

 

Everyone has their own unique financial fingerprint for investment risk that is acceptable to them.  You and your best buddy may both be retired, but adopting the same retirement and investment style may prove very disappointing.  A standard rule of thumb called the Rule of 100 is a good place to start.  Take the number 100 subtract your age, the result is the approximate percentage you want to have at risk.  This is a starting point, some of you may handle more and some less depending on circumstances such as other sources of income streams or just a very conservative posture. 

 

Remembering three key points may serve you well: 

First, your portfolio has to earn a rate of return to keep pace with the rising cost of living (i.e. Inflation).  

Second, you want some safety built in.  If the market goes down or interest rates go against you, then protection will help you from having to do something that goes against your comfort level.

Third, simplicity.  Not simplistic, but simplicity.  Your portfolio does not  have to be complex, just appropriate for you.  Design a portfolio with your strategy, your best interests in place.  The KISS theory works well here.  Keep it simple, your spouse will also thank you if they are the surviving spouse now needing to understand the investments going forward.

 

Dr. Dychtwald is trying to motivate you to make a difference for yourself with proper, strategic planning. 

 

Your active, senior years may be the winding down of your nest egg, but this time of spending should be as fun, exciting, and care-free as you can make it.  It is good to giveth… make it fun and fruitful to taketh….

 

….. Oh, that youthful vision when we dreamt of reaching a time of nothing else to do but spend money…….