They determined they needed $ 15,000 a month to maintain their current lifestyle , including a $ 2,500 monthly mortgage payment on their house . The mortgage has since been paid off , so that money is now free for other expenses or activities . They also no longer had to set money aside to contribute to their retirement plans , so that gave them extra spending money as well . At the same time , they had company cars before their retirement , and those would no longer be available .
“ Although the mortgage has been paid , we still included it in the amount we figured for monthly expenses to give them a safety margin ,” Blocki says . “ Many couples experience drastic changes to their spending habits in retirement , so when running retirement projections , we like to assume a higher level of spending than they anticipate to see if the plan can still be successful with some unfavorable assumptions built in .”
For their first year of retirement ( a period they ’ re still in ), the couple is using their severance pay . At the end of the first year , they ’ ll begin withdrawing 4 % annually from their 401 ( k ) funds .
“ The 4 % withdrawal rate is a widely used rule of thumb for new retirees , and we confirmed that this was a sustainable spending level by running the retirement projections for this couple to make sure that we were comfortable with the odds of success it showed ,” Blocki says .
He adds that he would have liked for the couple to invest their 401 ( k ) money in a broader range of investments , but they are restricted for the time being . “ Normally , a retiree would roll the assets in a 401 ( k ) plan into an IRA to gain access to a wider selection of investments . However , there is a penalty for withdrawing assets from an IRA before age 59 and a half . In the meantime , the 401 ( k ) plan allowed both of them to take withdrawals penalty-free as long as they were retired and over age 55 . So the assets had to stay in the 401 ( k ) plan . While this allowed them to withdraw some funds without penalty , it also heavily restricted how we could invest the remainder of the assets .”
He also wanted to water down the 95 % stock concentration in the plan , an allocation that had worked well until that point , but now needed more diversity . He set a goal of 75 % stocks for the first year and planned other shifts later . For funds outside the 401 ( k ) plans , Blocki wanted the couple to diversify across sectors .
“ I advised them to invest in some private credit and structured notes , which seemed like a radical idea for this conservative couple ,” he says .
“ We wanted to increase diversification with investments that were not correlated to the equities market ,” he continues . “ At the same time , we focused on education so they would know alternatives come
with their own rewards , but also their own risks . With Schechter ’ s institutional knowledge of asset classes in general and of specific managers it makes us very comfortable with the risk-reward tradeoff experienced when using alternatives .”
Blocki wanted the couple to be completely comfortable with these asset choices before any changes were made . Private credit investors lend money to borrowers who may have trouble accessing loans elsewhere , while private equity involves buying ownership shares in nonpublic companies . Money in these investments is usually tied up for longer periods of time . Structured notes , meanwhile , are complicated debt products that offer a variety of payouts , though they carry more risk .
Blocki ’ s firm , Schechter , views alternative investments as core portfolio holdings and proactively discusses these offerings with clients since alternatives can help them reach their financial goals . The average exposure to alternative in- vestments across the firm is 30 %, with the largest holdings in private credit and private equity .
The firm acknowledges in its client materials that “ investors who are new to alternatives may find it difficult to invest in funds with lockups of seven years or longer , but private credit liquidity is becoming friendlier to accredited investors with the growth of interval funds .”
As of right now , Blocki says the Michigan couple hasn ’ t moved into alternative investments , but they might in the future . “ For this couple , cash flow was not a problem , but the nature of their investments was ,” he says .
“ When running retirement projections , we like to assume a higher level of spending than [ clients ] anticipate to see if the plan can still be successful with some unfavorable assumptions built in .”
— Adam Blocki
Another thing Blocki had to plan for was the couple ’ s two adult daughters , for whom they wanted to provide a legacy . The couple owns land in Michigan , which they are adamant about saving for the daughters . They also want to have money left over at the end of what could be a long retirement to further provide for the children , Blocki says .
The next question to address was when the couple should start taking Social Security . They have deferred the decision for now , but projections indicate they should wait until age 70 , Blocki says .
Since they had not seriously considered retirement before they were offered the buyout , the couple had not put a lot of thought into what they would do in retirement , and they are now making those plans .
“ The bottom line was the couple wanted to hear ‘ You can retire ’ before they actually made such a life-changing move ,” Blocki says . “ They took the leap and are now both happily retired .”
MARCH 2024 | FINANCIAL ADVISOR MAGAZINE | 27