By Joel Dresang

A woman on my bus, who knows where I work, occasionally makes conversation based on financial news headlines. Am I worried, she asked me once, that the Fed won’t lower interest rates as expected?

I remind her that I’m not a financial professional, and then, to continue the conversation, I tell her that I personally don’t worry about the latest news flashes because my investments are for the long run. She nods and says that’s what her advisor tells her: Consider the long run. And she abides.

It occurs to me, though, that this woman has told me she’s 94 years old. Her long run and my long run are not the same.

Talking with her reminds me that each of us needs individualized investment strategies. The point of talking about the long term is to prompt us to plan, allocate and adjust so that we don’t outlive our resources. Whether we want to consume as much as we can while we’re able or to leave a legacy to our heirs, we don’t want to run out of money before we run out of time.

Of course, how much time we have is both unknown and peculiar. After the Landaas & Company Investment Outlook Seminars in September, one attendee offered that because she’s in her 70s, she wanted to hear less about investing for the long run and more about withdrawing money from her retirement funds.

In fact, Art Rothschild says, advisors take a lot of care in addressing individuals’ retirement spending. Again, it’s advice that is customized to each retiree.

“I think the single most important thing we do really is help our clients realize what their money is for,” Art said in a Money Talk Video. “They’ve worked their entire lives to build up a nest egg that’ll hopefully sustain them in retirement, and there’s nothing more important than talking to them about how much they can spend.”

Research suggests retirees are not spending enough of their investments. If not for the required minimum distributions enforced with strict penalties by the Internal Revenue Service, only 25% of Americans older than 70½ would be withdrawing money from tax-advantaged retirement accounts, estimates Alicia H. Munnell, director of the Center for Retirement Research at Boston College.

“To me, this result means the greater risk in terms of decumulation is that people will spend too conservatively and consume too little rather than spend too quickly and outlive their resources,” Munnell writes.

The demise of defined-benefit pensions in place of defined-contribution 401(k)s and IRAs has put the onus of determining spending strategies on retirees, Munnell notes. Evidence suggests retirees mostly don’t know how much to spend. And the trouble is there is no silver bullet. The answer is made to order.

There is a 4% rule of thumb that assumes that a 60/40 blend of stocks and bonds can afford a 4% annual withdrawal without eating into the principal. By that, a $200,000 investment would generate $8,000 a year. But Art notes that spending rates can vary from person to person depending on several factors, including:

• Risk tolerance. If a retiree is skittish about having 60% of their portfolio in stocks, a reduction would suggest lower growth over time and thus a ratcheting down on the withdrawal percentage.
• Time horizon. In theory, the closer an investor comes to not needing the money anymore, the more the individual can spend. “But you have to be very cautious because there are unexpected spending requirements that happen as we get older. For example, health emergencies,” Art says. “So I’d be very careful about overspending.”
• Objectives. In theory, investors who are less interested in leaving money behind for family or philanthropy can afford to spend at a higher rate that compromises their principal. “Again,” Art says, “I’d still be careful in overspending because you don’t really know what your final expenses are going to be, and heaven forbid you die broke. It’s not a good way to go.”

Objectives can also make a difference on which investment accounts retirees draw from. The retiree’s age and tax situation play a role, Dave Sandstrom explains, as do the tax situation of beneficiaries and the retiree’s charitable intentions.

“It’s something that I spend a lot of time with clients on,” Dave says in a Money Talk Video. “And while there’s no one-size-fits-all answer, I think it’s really important to have a good plan because making mistakes in this area can be very expensive.”

And that’s the point. Not one answer fits all.

Other Money Talk articles from Joel Dresang

We hold seminars and shoot videos and record podcasts to educate investors broadly about short-term patterns and possible long-term consequences. They’re not be-all, end-all advice sessions. Individual peculiarities—including time frames—require customized help.

Even a one-on-one appointment with an advisor isn’t supposed to be a one-time event. Investments change over time, as do individuals’ circumstances and objectives and tolerance to risk. To think you could meet once with an advisor and be set for life would be as silly as considering one doctor’s visit the only one you would ever need.

As for the woman on the bus, she impresses me by continuing to enjoy work and befriending fellow passengers and having the curiosity to follow current events enough to chat about them. Her long run could well be longer than I imagine.

Joel Dresang is vice president-communications at Landaas & Company.

(initially posted October 23, 2019)

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