Spending Strategies in Retirement

by Mitchell J. Smilowitz, CPA

For most of our working lives, we focus on saving and investing so we have the financial freedom to do what we want in retirement. Then we retire – often without thinking about how we can spend our savings so that it lasts the rest of our and our spouse’s lives. The problem is that a downturn in equity markets, especially early in your retirement, can sharply reduce the chance that your savings will last your lifetime.

Time Segmentation Strategy

The Time Segmentation Strategy, also known as the bucket strategy, allows you to protect your assets from market volatility. The strategy combines a conservative investment bucket (stable value, money market or other fixed income investment) to pay for 5-10 years of expenses with a more aggressive bucket in equities for the remainder of your savings.

The strategy is designed to replenish the conservative portion of the portfolio when equities increase in value. If equities decline in one or more years, you can decide not to replenish the conservative portion of your portfolio; that’s why you placed 5-10 years of retirement income withdrawals into a conservative investment. You can make up for the lost transfer to your retirement income portfolio when the stock market recovers. This allows you to avoid selling equities during a down market while allowing you to take advantage of the long-term growth stocks have historically provided.

Here's an example of how the Time Segmentation Strategy works.

  • The first row of the table shows that you have $750,000 in savings when you retire.
    • You plan to withdraw $30,000 of your $750,000 retirement savings balance annually.
    • You establish a conservative portfolio of $210,000 ($30,000 annual spending x 7 years) invested in stable value, money market or other low-risk investment vehicles. (To simplify the math, the gains from these conservative investments are not included in the example.)
    • The remaining $540,000 is invested in equities. The aggressiveness of this portfolio can vary based on your comfort with risk.
  • At the end of Year 1 of retirement:
    • Your conservative portfolio is $180,000 ($210,000 - $30,000 spent in Year 1).
    • Your equity portfolio increases by 6%, or $32,400, to $572,400.
    • You transfer $30,000 from your equity investments to replenish your conservative portfolio.
    • This reduces your equity account to $542,400.
    • Your year-end total balance in your portfolio is $752,400.
  • In Year 2 of retirement:
    • On December 31 of Year 2, your conservative portfolio is again at $180,000.
    • Equity investments decline 5%, or $27,120, to $515,280.
    • Not wanting to sell your equity investments when the market is down, you decide not to replenish your Annual Spending Fund.
    • Your year-end total balance is $695,280.
  • In Year 3:
    • Your conservative portfolio is now $150,000 ($180,000 - $30,000).
    • Your equity portfolio increases 7% and is worth $551,350.
    • With the rebound in equities, you decide to fully replenish your conservative portfolio by transferring $60,000 from your equity investments.
    • Your conservative portfolio has $210,000 and your equity account holds $491,350.
    • Your year-end total balance is $701,350.
  • In Year 4:
    • Your conservative portfolio is back to $210,000 on January 1 of your 4th year in retirement.
    • You begin the year with $491,350 in your equity portfolio.
    • During the year you spend $30,000 from your conservative portfolio.
    • Your equity portfolio earns 4% and the value of the portfolio increases to $511,004.
    • Your year-end total balance is $691,004 and you transfer $30,000 into your conservative portfolio.

As you can see, the time segmentation method allows you to enjoy the benefits of the higher long-term returns stocks have historically offered while funding your annual spending with less volatile investments.

The Time Segmentation Strategy allows you to meet your retirement income needs while minimizing the effect of market volatility on your retirement savings. Crafting a spending strategy to meet your specific needs is a major part of living in retirement. Please contact the JRB at 888-JRB-FREE (572-3733) or staff@jrbcj.org to work with you on a sustainable spending strategy.

April 2024