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By Benjamin Brandt, CFP
Retirement brings about so many financial questions. How will you pay yourself in retirement? Where should the money come from? How often should you rebalance your portfolio?
Have you been wondering these same things? Thankfully paying yourself and rebalancing your portfolio doesn’t have to be too complicated. It’s actually as easy as a bad 80s haircut.
How do you pay yourself in retirement?
It’s important to create a steady stream of income in retirement, but where should it come from? You’ll want to pay yourself from the cash portion of your portfolio so that you don’t have to sell your stock positions every month. Having between six months to two years of income on hand in cash is a good idea so that you can give yourself a regular monthly ‘paycheck’. Once your cash gets close to zero then you know it’s time to rebalance. Ideally, you’ll only want to rebalance once or twice a year. The longer you can go without rebalancing the more the compound interest will grow.
Get tactical about rebalancing in retirement
You know that rebalancing your portfolio periodically is important, but rebalancing your portfolio in retirement can seem daunting. You don’t have that same flexibility with your assets that you had in your working years. What should you do if it’s time to rebalance your portfolio and the markets are down? You don’t want to have to sell your positions and take a loss. Time isn’t on your side anymore and it takes a while to make up those losses. Rebalancing in retirement means that you have to get a bit more tactical.
It’s important to consider the market conditions when rebalancing. When the market is down then you’ll want to pay yourself from the bonds or cash portion of your portfolio. Work your way backward through the risk spectrum inside your portfolio so that you don’t have to sell your stocks at a loss. Consider selling treasuries, corporate bonds, and international bonds first. You want your stocks to have as much time to recover in a bad market as possible.
Use the mullet haircut to help you remember portfolio distributions
Remember the famous 80s haircut, the mullet? You know what I’m talking about — business up front and a party in the back? We all knew someone with a mullet. Well, picture that friend with the stylish hairdo next time you think about the ideal retirement portfolio distribution plan.
Here’s how it works. The front end of your portfolio, which you keep well-trimmed, contains your assets like cash, corporate bonds, international bonds, and treasuries. These assets are where you get the funds for your short-term needs. If you have a good portion of your portfolio to cover a few years of spending on the front end, then you can get wild in the back with the rest of your assets.
The back end of your portfolio is where the party is. This is where you keep your international equities, small-cap, micro-cap, and speculative equity positions. You want to stay away from this group of assets for a while and let them really grow. The longer they grow, the better.
So next time you find yourself wondering about your portfolio distribution in retirement, remember as long as you’ve got your business covered upfront you can let your hair down in the back.
Benjamin Brandt is a CERTIFIED FINANCIAL PLANNER™ and Founder/President of Capital City Wealth Management, a wealth management company exclusively serving retired clients. Benjamin is also the host of the popular retirement podcast Retirement Starts Today.
Benjamin is a combat veteran having served in the North Dakota Army National Guard for eight years, including a 15-month deployment to Iraq in 2003.
In his free time, Benjamin and his wife Kristen can be found on the weekends at the hockey rink or on the gymnastic mats chasing their six energetic children.