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Income & Distribution

A framework for sustainable income.

For retirees, the stakes are high, and the impact of bad decisions can be severe. Developing and implementing a spending strategy can substantially reduce the anxiety and stress regarding your ability to meet life goals. However, developing and overseeing a retirement-spending strategy can be a complex undertaking. As life expectancies increase, so will the challenges facing retirees as they will need to rely more on investment portfolios versus guaranteed income from pension plans and social security.

At the Gleason Group, we provide a framework to turn your investment portfolio into a sustainable and consistent level of income. We utilize a goals-based spending strategy with three basic components: prudent spending; a soundly constructed portfolio; and tax-efficient investment and withdrawals. Each component involves complexities and trade-offs. The rewards and consequences put a premium on skillful analysis and professional guidance.

Simple, not Easy

It sounds simple, but choosing an appropriate portfolio spending strategy that balances your competing goals— including differentiating wants from needs—is especially challenging because many critical factors affecting the outcome are beyond your control and often unpredictable.

For example, you have no control over the returns of the markets, the rate of inflation, or the length of your life expectancy. Yet, each of these variables significantly affects how much you can “safely” withdraw from your portfolio to provide for current consumption while preserving the potential to generate future income for the rest of your life, however long.

Dollar Plus Inflation

If your primary goal is spending stability, the “dollar plus inflation” rule might be a good option. With this strategy, upon retirement, you select the initial dollar amount to spend from the portfolio and increase that sum by the amount of inflation each year thereafter.

While this allows for more stable spending from year to year, it comes with the risk of either premature portfolio depletion or lifetime underconsumption because it is exposed to “sequence of returns risk.” A significant period of underperformance without adjustment could result in running out of money. Whereas a significant period of market outperformance provides you the ability to increase spending.

Percentage of Portfolio

At the other end of the spectrum, if your primary goal is not depleting the portfolio, the “percentage of portfolio” would be preferred. With this strategy, you spend a fixed percentage of your portfolio so that the annual spending amount is automatically increased or decreased based on the markets’ performance; this strategy is thus highly responsive to the capital markets.

Although the your portfolio will not be depleted, the spending amount can fluctuate significantly, which may not be an option if your non-discretionary or fixed expenses are a relatively high proportion of your total expenses. However, this is a good option for those with very high levels of flexibility.

Dynamic Spending

The dynamic spending strategy is a hybrid of the other two strategies. Here, withdrawals are kept within a maximum percentage increase and minimum percentage decrease in real (inflation-adjusted) spending.

This strategy allows you to benefit from good markets by spending a portion of your gains, while weathering bad markets without a significant reduction in spending.

You accomplish this by saving some of your upside returns for use on a rainy day when the portfolio otherwise would have required a more significant reduction in spending.

Portfolio construction

After your withdrawal strategy is determined, the second prong of our retirement-income strategy is a well-constructed portfolio.

Our simple, straightforward approach to portfolio construction separates assets into three easily identifiable “buckets,” each with a goal of meeting specific needs over a particular time horizon.

Each bucket is custom built based on a combination of your life stage, risk tolerance and specific goals. We help you avoid mistakes, reduce costs, minimize taxes and maximize returns. For more on our investment strategy check out our link below.

Tax Efficient Withdrawals

The third and final prong of our retirement-income strategy is implementing a tax-efficient withdrawal plan. Once we establish a comfortable spending target, the obvious question becomes “How?”

In other words, which accounts should you withdraw that amount from? Many retirees today hold various account types— taxable, tax-deferred, and tax-free (Roth IRAs). Implementing an informed withdrawal-order strategy minimizes the total taxes paid over the course of your retirement, thereby potentially increasing both the amount of spending the portfolio can support and it’s longevity giving you more money for living.

Life is short. What's your strategy?