Kiplinger's Retirement Report

RETIREMENT REPORT Your Guide to a Richer Retirement VOLUME 27 | NUMBER 8 | AUGUST 2020 | $5.00 the financial blow as they watched their investment account values plummet. Then, stocks lurched ahead and have since been volatile, leaving many retirees to wonder if they should adjust their game plan for retirement income as the economy opens up. “The first quarter IN THIS ISSUE of this year repre- sented the very defi- INVESTING nition of sequence 8 | Best Vanguard Funds risk,” notes Patrick TAXES Nolan, a BlackRock 10 | Capital Gains Tax Rates portfolio strategist. “Early in retirement, CAREER it’s the most chal- 11 | Ageless Resumes lenging situation for 14 | Information to Act On a retiree who has be- 16 | Your Questions Answered gun to take cash flow from retirement ac- ESTATE PLANNING counts. You’re sell- 17 | Health POAs ing assets, locking in YOUR FAMILY losses and impairing 20| Helicopter Children Drawing Down the future value of the portfolio.” RETIREMENT LIVING in a Pandemic To be sure, draw- 21 | Cars for Older Drivers ing down the right AS THE CORONAVIRUS SHUT DOWN THE ECONOMY LAST percentage amount spring, many consumers had their budgets cut by from a portfolio each year is complex business. There default. Trips and shows were canceled, nonessen- are tax implications, so drawing from the right ac- tial medical procedures were postponed and restau- counts at the right time matters. But knowing how rants closed. much a retiree can spend each year without running For retirees living on portfolios—or those forced out of savings in old age is even more important. into retirement unexpectedly due to the virus—the Plenty of tax and financial pros like to argue over JOHN W. TOMAC W. JOHN forced spending slowdown may have helped cushion the most tax-efficient ways of drawing down a portfo- The Studio Job Number: KIPS_KRR_Aug-20_CD-12_2450858_FINAL_an Client: Deposits Publication: Kiplinger’s Retirement Report Document Size (WxH): 7.875” x 10.5” Bleed: 8.125 x 10.75” Live: 7” x 10” Colors: CMYK KEEP DREAMING KEEP SAVING Create a future you can look forward to with Synchrony Bank. Our competitive rates and convenient mobile app make it easier to save in a way that fits your life. It’s banking in sync with you. Scan to learn more. synchronybank.com 800-753-6592 © 2020 Synchrony Bank The Studio Job Number: KIPS_KRR_Aug-20_CD-12_2450858_FINAL_an Client: Deposits Publication:lio once Kiplinger’s retirement Retirement has begun. Report Far fewer enjoy talking The RMD Method Document Size (WxH): 7.875” x 10.5” Bleed:frankly 8.125 x 10.75”about overall spending levels. Who wants to Other retirees try to limit spending to the amount cal- Live: 7”wade x 10” into the weeds of telling couples that trip to the culated for their annual required minimum distribu- Colors:Galapagos CMYK is off the table? tions from tax-advantaged retirement accounts. This But let’s go there, because the economic fallout from calculation is based on the ending balance of the ac- KEEP DREAMING the pandemic is challenging old assumptions about counts on the last day of the previous year, divided by withdrawal strategies, leaving some retirees cash- the person’s life expectancy. strapped and in a bind while others aren’t forced to cut As this year demonstrates, however, this strategy back at all. Here’s a look at some of the most common can be tough to follow in volatile times. Had RMDs not methods financial planners use to figure out how much been skipped in 2020 because of the CARES Act, for people can safely spend from a retirement portfolio example, retirees would have been forced to take big each year, and how sudden market shifts (like the one withdrawals based on 2019’s high balances and, poten- we saw in the spring) can affect them. The results may tially, much lower withdrawals next year if this year surprise you. ends sharply lower than last. 4% Revisited ‘Dynamic’ Strategies Consider someone who retired this year and decided The trick, experts say, is to smooth out withdrawals to use the withdrawal method popularized by William over time, hitting a sweet spot that allows retirees to Bengen, the financial adviser who in the 1990s came keep a fairly steady income even when markets are up with the Bengen rule. It involves withdrawing tanking, while not becoming so conservative that roughly 4% of a portfolio in the first year of retirement important lifestyle goals are sacrificed. That’s the and adjusting for inflation thereafter, regardless of definition of a dynamic withdrawal strategy. market conditions. Interestingly, experts who advocate dynamic with- Using the Bengen rule, a retiree with a $1 million drawal strategies haven’t been pulling in the spending nest egg would withdraw $40,000 for living expenses reins too tightly thus far. the first year. In year two, if inflation was 3%, the with- “We had one client who, out of the blue, wanted to drawal amount would increase to $41,200. make a big purchase that was beyond the expected an- But what if stocks had plunged, say, 15%? If after nual withdrawal, and we said, ‘This isn’t the time to do taking out the $40,000 at the beginning of the first this,’” says Stephanie McElheny, president of wealth year, and the portfolio then declined to $816,000, planning at Aspen Wealth Strategies in Arvada, Colo., our retiree would now be removing 5% of the actual who uses financial modeling software that calculates portfolio value by withdrawing $41,200 in year two. the probability of clients maintaining their assets KEEP SAVING That’s the problem with the 4% rule; it doesn’t throughout their life expectancy. account for portfolio performance. Amid lower For other clients, however, she saw no reason to expectations for both stocks and bonds ahead, it’s trim planned withdrawals right away, even as markets little wonder why more experts are suggesting retirees were in freefall in March. Using modeling software to Create a future you can look forward to with Synchrony Bank. Our competitive walk away from withdrawal rules that don’t respond at simulate possible market returns based on the March rates and convenient mobile app make it easier to save in a way that fits your life. all to market changes. portfolio lows, the probability that her firm’s clients It’s banking in sync with you. EDITOR EMERITUS EDITORIAL OFFICES SUBSCRIBER SERVICES Kiplinger’s Retirement Report Knight A. Kiplinger 1100 13th St., N.W., Suite 1000 Telephone: 800-544-0155 (ISSN# 1075-6671) is published monthly; E-mail: kiplingerretirementreport@ $59.95 for one year; $114.90 for two years; Washington, DC 20005 $169.85 for three years. MANAGING EDITOR emailcustomerservice.com Catherine Siskos Telephone: 202-887-6491 E-mail: [email protected] Copyright © 2020 by The Kiplinger Email: [email protected] REPRINT SERVICE Washington Editors Inc., 1100 13th St., N.W., facebook.com/KiplingersRetirementReport PARS International Corp. Suite 750, Washington, DC 20005. CONTRIBUTING WRITERS Scan to learn more. 253 W. 35th St., 7FL Periodicals postage paid in Washington, DC, Harriet Edleson CHIEF EXECUTIVE OFFICER New York, NY 10001 and additional mailing offices. Katherine Reynolds Lewis Denise Elliott Telephone: 212-221-9595 Ann Marie Maloney POSTMASTER: Send address changes synchronybank.com 800-753-6592 E-mail: [email protected] to Kiplinger’s RETIREMENT REPORT, Jeff Reeves SENIOR VICE PRESIDENT FOR CONTENT P.O. Box 420308, Palm Coast, FL 32142-0308. Janet Kidd Stewart Sarah Stevens ONLINE SUBSCRIPTIONS Joy Taylor Subscribers may sign up PUBLISHER Alina Tugend for free online access, The Kiplinger Washington Paul Vizza including past issues Editors, Inc., is part of the ART DIRECTOR Telephone: 202-887-6558 and annual indexes, at Dennis Publishing Ltd Group. Natalie Kress E-mail: [email protected] KiplingerRetirement.com. AUGUST 2020 KIPLINGER’S RETIREMENT REPORT | 3 © 2020 Synchrony Bank For his model portfolios to trigger a 10% cut in spending, withdrawals would have had to exceed 6.4% of his clients’ current portfolios, meaning a portfolio FROM THE EDITOR drop for both stocks and bonds of 22%. At the market lows in March, he says, the withdrawals got to 5.9% of This is not the easiest time for retirees to live off of the model portfolios. (Individual portfolios vary savings. That 4% withdrawal rate, traditionally seen slightly due to clients’ age or other circumstances.) as a safe percentage for savings to last, can pinch a The model allocations are 65% stocks and 35% bonds, portfolio in seesawing stock markets like this one. As the sweet spot, he says, for maximizing withdrawals. of early July, experts still can’t agree if we’re at the be- “When events make you question if your retirement ginning of a new bull market or in the middle of a dia- income plan is still sustainable, dynamic withdrawal bolically misleading bear. policies can tell you when you need to make a change,” With no end in sight to the volatility, our cover story says Guyton, who described the decision rules in detail compares how some common withdrawal strategies in a 2006 Journal of Financial Planning article. “We stand up in turbulent markets. All methods have their went into the year with slightly lower equity positions drawbacks, but if the goal is to smooth out withdraw- because valuations had gotten so high and withdrawal als over time, the clear winner is a “dynamic” strategy. rates were slightly lower than normal.” As the story shows, that strategy requires other com- That doesn’t mean clients were taking out less ponents to work.

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