Managing Money: The Distribution Phase

July 27, 2022

Managing money: the Distribution Phase.

There comes a time for most of us when we want to spend some or all of the money we have saved.  Retirement is a unique concept when it comes to money.  Most distributions involve saving money over time, then spending that money in one or just a few large chunks.  Usually that expenditure is to acquire an asset.  When we buy a house, we use money we have accumulated in one check to make the down payment.  When we buy a car, we use the equity in our last car and/or money we have saved to either make a down payment or just pay for it outright.  Even paying for college is a relatively short distribution phase that ends up in acquiring an asset (your degree or certificate). 

Retirement, on the other hand, represents a slow, methodical drip of distributions over a (hopefully) long period of time.  There is no asset to acquire.  All they are doing is financing a lifestyle.  The concept is to use your wealth to provide you with income for the rest of your life.  If a person saves their whole life, and spends their retirement assets all at once, they most certainly got it wrong and retirement will be very short-lived.

With that in mind, investing DURING retirement has a completely different strategy.  If a person retires at age 65, they should theoretically have about 20-25 years of retirement before they pass away, according to U.S. mortality tables.  While that is almost never how each person’s story plays out, as their own individual health at 65 can raise or lower life expectancy, it is a good starting point for discussion.  As a matter of fact, that’s the MOST important factor when we talk retirement planning.  How long do you plan on retiring?  In a nutshell, the appropriate question is, “when are you going to die?”

That is the great unknown question.  So how do we plan for the unknown?  Retirement for a 65-year-old person could last days or decades. 

The accepted approach is to plan for the long-term.  People don’t want to face the spectre of going broke decades after they quit work.  Planners don’t want to deliver news to clients that their retirement savings is disappearing and they’re going to have to make some very difficult decisions.  Thus, we plan for decades, not for days. 

This type of planning requires work.  No matter the amount of wealth a person has acquired, their personal spending habits cannot exceed what their assets can support.  Retire with $25 million, spend $24.5 million on a private island, and there isn’t enough wealth left over to live off of.  Retire with $250,000, have no debt, and spend less than social security pays, then there will be wealth left over at death. 

So, step one is to have a realistic budget.  Step two is see if a well-diversified portfolio is strong enough to support that budget.  The rule of thumb is that a person can spend 4% of their retirement fund per year and have confidence that their money should last as long as they do.  Reverse engineer the math, and a $1,000,000 portfolio should support annual spending of $40,000 for a 25 year retirement.  If the budget exceeds that spending goal, then one of three things needs to happen: die sooner, spend less, or save more. 

To sum it up, planning for retirement is a very involved process that starts at the first penny saved and ends at death.  It’s the largest financial goal for most Americans.  The unknown length of retirement is akin to hitting a moving target.  Be conservative.   Be smart.  Use an experienced advisor. 


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.