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On this episode of The Long View, we talked with Dana Anspach, the author of a new book about retirement called Living Off Your Acorns: Your Guide to the Four Phases of Retirement. The conversation ranged from the phases of retirement to financial fraud and getting comfortable with spending in retirement (it’s not easy).
Here are some excerpts from our conversation with Anspach, founder and CEO of the financial planning firm Sensible Money.
Preparing for Big Market Shocks
Amy Arnott: Let’s talk about the financial side of planning in the pre-go phase. What’s the retirement red zone, and how can people try to mitigate risks as they’re in the years leading up to retirement?
Dana Anspach: The retirement red zone is generally about the first five years before retirement and the first five years of retirement, where your portfolio and future outcomes are more vulnerable to big market shocks such as a bear market or particularly a prolonged period of underperformance with your portfolio. And I think there’s several different aspects of this. One, we know that if we retire into a boom market, we’re going to have better long-term outcomes than if we don’t. And there’s a certain aspect of that we don’t have control over. Maybe we could work an extra year or two if we were in the middle of a bear market and didn’t want to retire then, but maybe not. So, the first aspect is simply testing your plan against these past historical outcomes. Would my plan have worked if I retired in 2008 or 2009 or 2000? Or the 1960s was a bad time.
Would my plan have worked? And that brings a certain peace of mind right there. And if your plan would’ve worked over, let’s say, the worst one-third of historical outcomes, most of the time we’re not going to get that worst one-third. So, I don’t like people who enter retirement and spend as if it is the Great Depression right now. That does not make a lot of sense to me. What does make sense is to have the plan tested and say, “OK, it would have worked.” Great. It’s not the Great Recession. We’re not in a big bear market. So, let me adjust my spending to accommodate my go-go years. And if a different set of conditions should materialize, I know ahead of time some adjustments that I can make. And so, I have a plan if that happens, but the majority of the time that’s not going to happen.
To me, that’s how you plan for the long-term outcomes of this retirement red zone. And then the other aspect of that is the behavioral risk. If a big adverse market event happens, are you prone to panicking, or are you likely to go to cash? Are you likely to abandon your plan? And I do believe certain portfolio strategies help. I’m a fan of bucketing or time segmentation where you’re using specific fixed-income cash deposits or bonds that mature to match the cash flows that you’re going to withdraw in the first five to 10 years because I believe that helps people stick with their plan and have a greater peace of mind and knowing, OK, if the market drops 20%, I know where my cash flows are coming from. And I can think in five-year chunks of time. I know I don’t have to adjust my spending for five years. It’s covered. I have time to make adjustments if this turns into a more prolonged bear market. … The reality is if we retire into a really bad time, it’s going to look different from in a really good time. And how do we design portfolio strategies to help us behave better if those bad times come along?
Building Your Retirement Ladder
Christine Benz: Let’s delve into that two-bucket approach that you use with your clients and that you detail in the book. You use a paycheck-replacement bucket as well as a growth bucket. Let’s focus on that paycheck-replacement bucket. What goes into it? How large is it? And when do you start building it out in that pre-go phase?
Anspach: These are hard questions to answer, and they vary by the client. I think there’s the bucketing and then the total return strategy. And if you’re using the bucketing strategy, one of the big questions in the industry is, “Well, how long should my ladder be?” In an ideal environment, you would start building this bond ladder about 10 years out from your desired retirement date. But I have a paper called The Wind Down on the Investments & Wealth Institute where rather than laying out a specific number of years of cash flow that’s covered, it’s more of a process. If I have projected my retirement, and I have a personal, think of it as a personal benchmark to measure against, and I’m ahead of that benchmark, I would sell out of my equity bucket and, let’s say me, I’m 55 today. Let’s say I’m going to retire at 65, and I know I’m going to need to withdraw 80,000.
And so, I might sell stocks today. It’s been a good couple of years in the market, and I buy a bond that’s going to mature for $80,000. And the way we like to do our planning, that $80,000 already has inflation baked in. It’s not $80,000 in today’s dollars. I’ve already projected that’s what I’ll need in 10 years, assuming that inflation continues. And so now, I’ve secured year one, the rung of spending on my ladder, and next year, if equity markets are up, I do the same. And the next year, let’s say suddenly we are in a down market, and I have a negative return on my equity portfolio. Well, don’t add on year 3 of my ladder. Now I’m 59 years old, and so if the markets are up, I continue. And so, by the time I get to retirement, depending on the market conditions I encounter, I could have anywhere from a five- to an eight-year ladder that I’m entering retirement into, knowing that number of years are covered.
And so, I think of that process as more important than I have to get to retirement with eight years or 10 years cash flow covered because it allows us to adjust against the market conditions that we encounter. We don’t really know what those are going to be ahead of time. And so, instead of following a set rule, how do we follow a process that helps guide us and has some flexibility built into it?
Valentina Djeljosevic contributed to this article.
