Do you ever feel like you spend most of your life saving and saving and saving for retirement (or financial independence), worrying about how much you should have invested in stocks or bonds or mutual funds or GICs, and if it’s enough, but that what you do with your money after you reach that magical goal is a complete and utter mystery?

Yeah.  So does the rest of Canada.  We concentrate so much on the “how much do I need to retire?” question that the “and how should it be structured?” question gets ignored completely, and we create repeat generations of confused people in their sixties, with a pile of money and no clue what to do with it.

Related: Have you made your retirement plans?

See, the shift between “stop saving” and “start spending” is pretty quick, but how the spending happens is just as important – if not more so – than how the saving happens, and there’s no interregnum between the two where you get to sit on top of your accumulated hoard, gloating like a dragon and contemplating your withdrawal strategy.

The single most dangerous time for your investments is in the few months and years when you start needing money from them.  Normally, when the markets go for a dive and your investments start to lose value, it’s only on paper.  You’re not actually selling your mutual funds at a 40% loss because – as a wise, steady investor – you stay invested through the good times and bad, regularly rebalancing your portfolio and adding to it with ongoing savings, right?  But you saved up your money because, presumably, you need it to live on, and if you stop working on June 3rd, 2021, you’re going to have to eat on June 4th, 2021, no matter what the stock market decides to do that day.

But here’s the catch: while it’s a wise move to have some money available for you to access without fear of volatility in the short period after retirement, it’s not wise at all to protect every single penny from the vicissitudes of the stock market for the long term, because inflation will devour it and increase the chances of you running out of money long before you should.

Related: Effective retirement planning is about spending, not saving

What you need to understand is that you have zero control over what the markets will be doing when you retire, and how strongly their behaviour determines the likelihood of your investments providing you sufficient income until you die.  There are only three possible market scenarios:

  • The market goes for a nosedive right when you start spending, and the remaining money isn’t enough to benefit much from later recoveries. (this is bad)
  • The market is white-hot when you retire and start withdrawing, and your investments grow enough in the first half of retirement that no subsequent downturn can diminish them faster than you need to spend. (this is good)
  • The market is in-between one of the two states. (this is…meh)

So what’s a wise dragon to do?  My advice (based on research from Dr. Wade Pfau and Michael Kitces, the two smartest minds in retirement income planning today, whose work you can follow here) is to think in buckets.

The first bucket is the one you’ll spend from in the first few years of retirement, when you’re most vulnerable to sudden drops in value.  The second bucket is the one that holds the rest of your nest egg, invested in equities and therefore continuing to grow throughout the twenty or so years of average life-expectancy you’ll have after the office door swings shut behind you for the last time.

Related: 16 habits that helped me retire wealthy

I’m sure you’ve heard or read that your asset allocation should shift towards less volatile investments as you approach the point in time where you stop accumulating and start withdrawing.  That’s pretty solid conventional wisdom, and in the context of the buckets, it means you fill up your safe spending bucket gradually as you get closer to needing it.  What might give you the willies is the next part of the Pfau-Kitces research: once you actually start withdrawing, your equity allocation should start to increase again.

What they refer to as the “rising equity glidepath”, you can intuitively grasp as the gradual emptying of the spending bucket and the gradual but still volatile growth of the continued savings bucket.  It doesn’t mean that if the market value of everything you own is acceptable at retirement that you still slavishly withdraw only from your spending bucket; instead it gives you the maximum protection possible from the worst of the retirement scenarios, while giving you flexibility to benefit from the best of them.

Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario.  She and her husband have three kids under five, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough.  She takes her clients seriously, but not much else.

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