We spend our careers learning to accumulate. Once we stop adding to our investments and start drawing from them, the strategy has to change.
The traditional answer is to make the portfolio more conservative and withdraw 4–5% a year. That addresses volatility, but not withdrawal risk: being forced to sell investments while they're down to fund income, which can do lasting damage to a portfolio. Recent years showed that stocks and bonds can fall at the same time, so even a conservative portfolio may not protect against this.
Two hypothetical retirees each start with $1,000,000 and withdraw $46,000 in the first year, raising the withdrawal 2.5% a year. Both portfolios average 6.0% over 30 years.
Same average return, same withdrawals. Only the order differs.
Rather than drawing income from one blended portfolio, a Duration Plan divides retirement assets into time segments, each responsible for a few years of income.
Assets are split into segments, each funding roughly five years of income during a specific future window, built out to age 95 or beyond.
Near-term segments hold conservative assets designed to protect principal. Later segments can take measured risk because they have time to recover.
Income comes from the earliest segment first. Every later segment keeps growing until its turn. As each segment is spent down, the next one is de-risked and becomes the new income segment.
Capital beyond what income requires compounds in a long-term legacy segment, available for unplanned needs or heirs.
One of the greatest risks to a retiree is being forced to sell growth assets during a downturn to fund spending. Because near-term income sits in protected segments, a market decline doesn't dictate your income.
Each segment first grows until it is needed, then delivers income during its window. Segments needed soon sit low on the risk scale and pay income early. Segments not needed for years can take more risk, because time lets them grow and recover before their turn.
Segments funding the next several years hold conservative assets designed to protect principal. Their role is dependability, not growth, so a market decline doesn't disrupt the income you're drawing today.
Segments and the legacy allocation not needed for 15 to 35 years can accept more risk in pursuit of higher returns, because time gives them room to absorb and recover from volatility before they move into their income phase.
Illustrative of the strategy's structure only; segment risk levels and timing are conceptual and not a guarantee. Higher risk entails greater potential for loss. This material is illustrative and hypothetical. It is not a recommendation, projection, or guarantee of future results, and is not tax or legal advice.
The structure above shows how a Duration Plan works in principle. A personalized plan from Wealth Management Strategies applies it to your actual accounts, timeline and goals, and shows what your own segments, income and legacy could look like.
Available through your ACG membership, with no obligation.
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