Financial planning for the early phase of retirement is generally straightforward. Your plan is typically developed while you are in the accumulation phase with a predictable income. Your primary decisions center around:
- How much you need to retire.
- How rapidly you can accumulate the funds needed.
- How to invest your assets to supplement your contributions.
- When you hope to retire.
You still have a degree of flexibility, including putting off your retirement date if you have missed your goal for any reason.
The first wave of retirement
You have less flexibility once you are retired and have transitioned from the accumulation phase to the decumulation phase: you will have received and deposited your last paycheck. But in the early years – during the first wave of retirement – you still have most of the assets you set aside and can feel comfortable withdrawing and spending them.
Even if your retirement vision turns out not to be one that works for you, you can adjust. If you are early in the spending phase, you might move to a Plan B by simply reallocating the funds to new priorities without any compromises. You may still feel assured that your investments and savings will be sufficient.
The second wave of retirement
Things can become more complicated during the second wave of retirement. For example, you may have built a portfolio yielding 4% gains which permits a 4% annual withdrawal rate. But those rates – which felt theoretically stable during the planning process – can disappoint. Markets may not perform. Unexpected expenses may require drawing down assets faster than planned, or inflation may be higher than forecast. Anything that affects your ability to stay within the guardrails of your retirement plan puts at risk your portfolio’s ability to last as long as you do.
One disrupting factor often overlooked is the rate at which spending increases or decreases as you age. Many in the planning community refer to this as the “go-go,” “slow-go” and “no-go” periods.
- Go-go takes place early in retirement when you fulfill your bucket list: traveling, entertaining yourself and enjoying the hobbies and sports you never had time for. (You may have had this phase in mind while building a long-term budget.)
- Slow-go occurs as your energy starts to wane, you’ve checked off bucket-list items, travel feels more complicated, and you are content to stay closer to home. Your spending will decrease in this period.
- No-go is when you feel the impact of aging, and health issues become more pronounced. While you may not be spending as much on travel and entertainment, you may be paying ever-growing medical bills. And this phase could last five years – or twenty years. For most retirees, expenses rise significantly as they get closer to the end of life, so the spending they planned years ago is no longer sufficient.
Another disrupting factor can be sequencing risk. If there is a market downturn during the multiple decades of retirement – as there almost certainly will be -- then maintaining the same withdrawals for regular income means that the portfolio will not recover to the same degree as the market. For example, if a significant downturn occurs early in retirement, taking your regular withdrawal from a lower-value portfolio represents taking out a larger percentage of your assets. Then, when the market turns around and starts to climb, you will have fewer shares to ride the rising tide.
So what’s the solution? Savvly.
Savvly is a risk-pooled retirement plan that replenishes funds at the age you choose – as an investor – sometime after your mid-70s. It allows you to start the second wave of your retirement with a sizeable nest egg. Knowing that you have an infusion at a specific age allows you to spend more freely in earlier years instead of reining in spending for fear of outliving your money.
You and other investors purchase shares in a Savvly plan with a recognized stock market index as the underlying investment. Thanks to pooling, contributions provide greater returns to those who reach their distribution date. Contributions by those who withdraw for whatever reason (by choice or through death) receive only a partial return, thus enhancing the balance remaining for the others to share.
Savvly’s payout comes from two sources: the underlying index’s growth during the holding period and your share of the redistributed contribution of those who departed the fund.
By allocating just 5-10% of your retirement savings in your 50s or 60s, you can have the funds you need for your later years when you receive your payout on your distribution date.