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The Retirement Rules Have Changed
In a volatile market , there are new ways retirees will want to seek income after they leave work . By Karen DeMasters
THE OLD WAYS OF GENERATING INCOME IN RETIREment are out the window , according to David Scranton , founder of Sound Income Group , an RIA and money management firm based in Fort Lauderdale , Fla .
In the past , many advisors likely told clients they could withdraw 4 % a year from their portfolios and that they “ probably ” wouldn ’ t run out of money . Alternatively , advisors set up buckets of cash that clients could spend down without tapping out . Again , that meant “ probably .”
But when the consequences are so severe — running out of money before you run out of life — these techniques are not good enough , Scranton says . “ For one thing , nobody can agree on what a safe withdrawal rate is . Is it 4 % or 3 %? If there is an 85 % chance you will not run out of money , or a 90 % chance , that means there is a 15 % or a 10 % chance that you will run out .
“ The only safe strategy is to generate real income , and to do that you have to continue to invest for growth , even in retirement ,” he adds .
For the first time in a decade and a half , bonds are back in fashion . Alternatives such as real estate and REITs also can play a part . “ These resources worked to generate income for us in the bowels of the stagnant interest rate environment , so they will continue to work now ,” Scranton says . Sound Income Group is generating 4 % growth for its clients ’ portfolios after fees , he says . Clients who are not spending down their principal but instead generating growth will not run out of money .
Aaron Hodari , chief investment officer of Schechter Wealth , a financial services firm based in Birmingham , Mich ., agrees that dividing assets into buckets is impractical . “ Assigning particular assets to particular expenses can create a misalignment ,” he says . Instead , advisors should look at a client ’ s entire portfolio .
Hodari says investors often fail to calculate the inflation rate , and if they concentrate on stocks that pay dividends they will be missing some necessary diversification .
“ The 5 % return you get today is going to buy less in 20 years , so you still need growth in a portfolio ,” he says . “ Shifting all
JULY / AUGUST 2023 | FINANCIAL ADVISOR MAGAZINE | 53