Common Retiree Investment Mistakes That Can Sink Your Plan

In this episode of the Happiness in Retirement podcast, I delve into the critical mistakes that individuals often make when transitioning from the growth or accumulation phase of their financial lives to the enjoyment or distribution phase of retirement. As we approach the magical age of financial independence, it’s essential to shift our mindset and strategies regarding investments, and I highlight the common pitfalls that can jeopardize a secure retirement.

The first mistake I discuss is the tendency to become overly conservative with investments. Many retirees believe they should drastically reduce their exposure to stocks and increase their fixed income holdings. However, this approach can lead to insufficient returns that fail to keep pace with inflation and taxes, ultimately threatening purchasing power. I emphasize the importance of maintaining a balanced portfolio, suggesting that retirees should consider keeping around 80% of their investments in dividend-paying stocks to ensure their money grows adequately over time.

Next, I address the critical need for a well-defined income withdrawal strategy. Many retirees withdraw funds from their portfolios without a clear plan, which can lead to financial strain. I explain the importance of determining where to pull money from—whether it be stocks, bonds, or cash—and from which type of account (taxable, tax-deferred, or tax-free). A strategic approach can minimize tax liabilities and ensure a more sustainable income stream.

I also cover the mistake of drawing too much or too little from retirement savings. In a bull market, it’s easy to become overconfident and withdraw more than is sustainable. Conversely, some retirees may underutilize their funds, leading to an unspent nest egg at the end of their lives. I introduce the guardrail strategy, which allows retirees to adjust their withdrawals based on market conditions, ensuring they neither overspend nor underspend.

Finally, I stress the importance of focusing on income generation rather than the overall value of the portfolio. In retirement, the goal shifts from growing wealth to generating a reliable income stream. I encourage listeners to prioritize dividend income, as it provides a buffer against market volatility and inflation.

Throughout the episode, I provide actionable insights and strategies to help retirees navigate these common mistakes. I invite listeners to reach out with any questions or for personalized advice, emphasizing that a fulfilling retirement is within reach with the right planning and mindset.

Join me as we explore these essential topics to ensure your retirement years are not only secure but also enjoyable.

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The happiness in retirement podcast is a holistic financial planning show that teaches you how to maximize your wealth and your happiness, and its for anyone who wants to squeeze all the juice out of their life - and their money.

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SPEAKER_00:
Welcome to the Happiness in Retirement podcast, where we help you turn your retirement dreams into reality. Each week, we'll dive into smart financial strategies, lifestyle tips, and expert insights to help you build a fulfilling and secure retirement. Whether you're planning ahead or already enjoying retirement, this is your go-to place for inspiration and practical advice. So sit back, relax, and let's make your golden years the best years. The views expressed in this podcast are that of Bill Del Setti and are subject to change based on market and other conditions. This podcast may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and opinions and should not be considered as indicative or actual events that will occur. The information provided is for educational and informational purposes only and does not constitute investment advice, and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. You should consult your financial professional, attorney, or tax advisor.

SPEAKER_01: Thank you for joining me on this episode of the Happiness Retirement Program podcast. Today, I wanna talk about the top mistakes I see people make when they make the transition with their investments from the growth or accumulation phase of life to the enjoyment or distribution phase of life. Now, when you are in what we call the growth phase, that's when you're accumulating wealth, you're working, you're raising a family, You've got a lot going on. You're not really paying attention so much to your money. It's growing. You don't worry about market declines because you won't need the money for quite some time. It's off in the distant future. But then as you get closer to that magical age of financial independence, you might start to pay more attention to your money. And that's not necessarily a good thing, by the way, which is the subject of another podcast, paying too much attention to your investments. But there are common mistakes that people make over and over again. And the first mistake that I see people make is that they become too conservative with their money. And there's a mantra that when you retire, all of a sudden you should go from investing for growth or having more money in stocks to having less money in stocks and investing in fixed income. And the problem with investing too conservatively is that you run the very real risk of not earning enough such that you maintain your purchasing power in retirement. A rule we have at Del Ceti, internal rule, is that anything that reduces volatility in a portfolio reduces return. potential over the course of time. In other words, by trying to fix principle or protect your principle at all costs in retirement, then you're probably going to earn a very low rate of return. that volatility is the price that you have to pay in order to earn enough. We think at Del Ceti Capital, in our opinion, in order to earn enough for your money to grow, to keep up with taxes and inflation. Nowadays, it's not uncommon for retirees to live 30 or 40 years, and that money's got to last that long. But instead of focusing on inflation, people focus on market volatility, and I think that's a little misguided. Inflation is just simply that the cost of everything that we buy goes up year in and year out. And in years where inflation is relatively tame, say two or 3% a year, you don't really notice that increase in the stuff that you're buying so much. But we did go through very recently a couple of very high inflation years, 79% increase in the cost of the things that we buy from food to gasoline, eggs. You really notice that. And if your money is conservatively invested, so that it doesn't fluctuate, then certainly at least at that point in time, there's no way that you earned enough to keep up with taxes and inflation. And yes, you would have then avoided the volatility that comes with investing a good chunk of your money in quality stocks. That's true. But that fixed income is a recipe for disaster on a rising cost world. So investing too conservatively, not having enough of your money in stocks, and here at Dell City, we like dividend paying stocks in retirement, you're shooting yourself in the foot. That money's got to last a long time and it has to grow at least as fast as taxes and inflation in order for you to maintain your standard of living. So that's mistake number one, thinking that you retire, you should just all of a sudden become more conservative. Now, I'm not suggesting that you should have all of your money in stocks or stock funds, not at all. However, 80%, I think, at least in our retiree dividend income model at Del Ceti, is the number that we like to see. So we have our clients 20% fixed income in cash, investments that don't fluctuate as much as the market, the fixed income side still fluctuates a bit, but then 80%, in a diversified portfolio of dividend paying stocks. And yes, it does fluctuate quite a bit, but we counsel our clients that that is part of the price you have to pay in order to have the chance to maintain your purchasing power. And nothing will deplete a portfolio faster than a very high inflation rate and a very low rate of return. You see, when that happens, you have to spend more of your dollars just to buy the same amount of stuff and you're going to deplete your portfolio. So you want to make sure you have enough in quality stocks in order to beat inflation. Don't go too conservative. Now, I'm going to add a caveat here, and the caveat is, look, if after being educated and learning about the risks of fixed income in a rising cost world, investing too conservatively, it still keeps you up at night to be investing in stocks, then by all means, you shouldn't be in stocks because your health and peace of mind should be job one. But that will come at a cost, and that cost is that you run the very real risk of running out of money sooner because you're going to lose your purchasing power. So that's mistake number one. Mistake number two, the mistake of not having an income withdrawal strategy in place. When people retire sometimes and they start trying from their portfolio to live on, which is great, that's what the money's for, often they do not have any kind of a strategy in place. And by strategy, I'm talking about a couple of things. Number one, where to pull the money from, stocks, exchange-traded funds, bonds, bond funds, cash, and from what type of an account. So there it's really a two-pronged question. Do you take your monthly withdrawal? Let's say if you're taking money monthly from your portfolio to supplement your fixed income, do you take that from the cash portion? Do you take that from bonds? Do you take it from stocks? you want to have a strategy in place. And generally, the way that we do things at Del Ceti is we take the income from the money market fund in our clients' portfolios, but the money in that money market fund is replenished by dividends and by us selling and rebalancing from time to time the portfolio. So many people, and again, here's something that we see frequently, they have an income need from their portfolio but they draw that monthly income from a stock fund. Now, why is that a problem? Well, it's not a problem as long as that stock fund is going up in value, you see. But if it goes down in value 30% or more potentially, which happens about every five years, then you're having to sell more shares. to meet that income need. You see your income need is fixed, but the portfolio value is declining. And in that stock fund, that will by all means fluctuate. If the value of that fund declines, you have to sell more shares. to generate the same income. So probably not a good idea to draw your portfolio income from a stock fund. You want to have a strategy in which you pull from the side of your investments that doesn't fluctuate much and then replenish that from time to time. Let the stock portion of your portfolio fluctuate as it will. Trim it from time to time to replenish your cash and fixed income. but only when the market is high. This puts you in control so that you don't have to sell your stock investments when they're low and replenish that cash and fixed income side of your portfolio. The other thing you want to do, or we're big fans of certainly, is paying those dividends from your portfolio in cash. Have them direct deposited into the money market fund in your portfolio. That's where you're going to be pulling that systematic withdrawal. Most people in retirement, they replace that bi-weekly paycheck, let's say with a monthly withdrawal from their investments, it gets automatically put in their bank account. But if you have dividend paying stocks in your portfolio, which we're big fans of, have the dividends paid into the money market fund, and that's what's going to go into your bank account. Don't have them reinvested. The other issue is what type of an account should you draw from first? Now, here's what I mean. If you think of there being three different kinds of accounts from which you can draw from, the first being a taxable account, The second being a tax-deferred account like an IRA or a 401k. And the third being a tax-free account like a Roth IRA. You want to set up a withdrawal strategy that is the most tax efficient, that causes you to pay the least amount in tax over the course of your lifetime. Many people just pick one of the accounts and they start drawing from it. Maybe it's the IRA. and they're paying tax every time they withdraw money from the IRA. But they also have a taxable account. Maybe they would have been better off taking some money from the taxable account and the IRA, so it doesn't bump them up into a higher tax bracket. Maybe it makes more sense to take money from a Roth IRA, which is tax-free. That income is tax-free. Every situation is different. We use very sophisticated tools to help clients with that withdrawal strategy. And by the way, It's pretty hard to know what withdrawal strategy is best for you if you don't know your tax bracket, if you are not familiar with tax law. Certainly having a background in tax helps. If you're gonna do it yourself, be sure that you understand how to read a tax return and you need to be familiar with things like what your tax bracket is, what we call your marginal rate. Many people don't think of a withdrawal strategy and it costs them big tax dollars. Third mistake, drawing too much or too little from their portfolio. When we have been in a bull market for many, many years, meaning the markets has gone up and up and up, People get a little too giddy and carried away and they may think, well, hey, my portfolio has gone up by 12% a year. Why can't I take 8%? And that's fine if it's going up by 12% a year. But as we know, trees don't grow to the sky. And if you're taking an 8% withdrawal from your portfolio and it declines by 20%, And you do that for a couple of years, you're gonna be in big trouble. So you want to have a withdrawal strategy. First, don't take out too much. Depending on how you're invested, anywhere from say a four to five, five and a half portfolio withdrawal rate generally makes sense. Okay, generally, depending on how you're invested and also depending on your time horizon and whether or not you want to leave a legacy. So these are all the factors that you need to consider. You don't want to be taking out a 7% or an 8% withdrawal rate or 7% or 8% of your portfolio value. You want to be reasonable there. But along with that is maybe drawing too little. And so money is a means to an end, not an end in itself. You have a limited window of time in your life from which you're going to be healthy enough to really enjoy your money. And you should be enjoying it. You should be spending enough. You could end up, as many people do, at the end of your life with a big pot of money that you could have enjoyed. But the problem is many people say, well, how do I figure out what the proper amount to take out of my portfolio is? I have no idea. You need to think about what you want to leave behind, if anything, and you want to use an approach that is going to let you sleep at night. So some people like to take just the dividends from their portfolio. Now, if you're invested in, say, the S&P 500 index, that's not going to give you very many dividends. But if you have a portfolio of dividend paying stocks, maybe you can get that yield anywhere from say 3% to 5% in any given year, and you just take those dividends. Okay? But still, if you do that, that's going to leave the principal intact. So you literally want to spend down that portfolio. And we use a strategy called the guardrail strategy. This is a breakthrough a very disruptive way of planning for retirement income. But what the guardrail approach does is it sets guardrails on the top and the bottom of your portfolio, if you will, if you can imagine these guardrails. And if your portfolio value goes up and hits that top guardrail, then you want to take more from your portfolio. And if the value of your portfolio hits that lower guardrail, you take less out for a while. And it dynamically adjusts. for market conditions. And we can solve for somebody who says, I don't want to leave any legacy behind now. I want to spend everything. To the folks that say, I want to leave my kids a million dollars. And we just simply adjust those wits rolls based on market conditions to get you as close to that legacy goal as we can. To me, that's the best way to plan because nobody knows the future. So it's kind of like the Goldilocks plan, right? Not too much or not too little. Not too hot or not too cold. You want to take out enough, but you don't want to take out too much. Do you want to leave a legacy? You don't want to leave a legacy. Let's get you as close as we can. to dying broke as you want. And again, this guardrail approach to me is revolutionary because we can't control the markets, but we can control how we respond to the markets. And that's what matters at the end of the day. So have a withdrawal strategy, focus on income, not on principal value. Okay, so this is the final mistake I see people making. They fixate on the value of their portfolio, not the income that it's generating. You see, when you're in retirement, the objective completely changes. It should be about income. That's what you take to the supermarket. That's what you use to live on. But you see, people become so used to fixating on the value of their portfolio and its growth that they miss the boat, because yes, that does matter over the course of time. But what matters more is that you're generating an ever-increasing stream of income that has the ability to at least keep up with taxes and inflation and maybe even grow beyond that. And so to us at Dell City, that's why we're big fans of dividend paying stocks. But we, on our performance reports that we prepare for clients, we actually show them and in the reviews that we have, A, how much they're taking compared to this guardrail number that we just talked about. What is the guardrail approach saying they should be taking from their portfolio? And B, how much they're taking out of their portfolio compared to how much dividend income we're generating? Because that's what matters. So we actually show our clients Hey, look, you took 4% from your portfolio last year and all of that was dividend income. And so we help our clients to really see beyond the volatility, which is just part of the game, and to just pay attention to the income. Is it going up? Is your dividend stream increasing more than inflation and taxes? Is it declining? What's going on? Remember, fixed income in a rising cost world is a recipe for disaster. So really what I'm saying is you want to make sure you have lots of high quality dividend paying stocks in your portfolio to generate the income to get you through those times when the market isn't cooperating. Well, that's it, folks. Those are the mistakes I see people making time and time again, focusing on portfolio value instead of dividend income being generating. generated. Going too conservative with our investments, not having enough stock in the portfolio, or the mistake of protecting principal at all costs instead of viewing market volatility as the price to pay to have the potential to have an income stream that you can outlive. And finally, not having an effective withdrawal strategy, taking into consideration where you're pulling the money from, what type of an account and how much. Is it too little? Is it too much? Or is it just right? Any questions about any of this, please give us a call, shoot me an email, billathappinessfromretirement.com. And thanks for joining me today. We'll talk to you next week.

SPEAKER_00: That's it for today's episode of the Happiness in Retirement Program podcast. We hope you found some valuable insights to help you create the retirement you deserve. If you enjoyed this episode, be sure to subscribe, leave a review, and share it with someone who's planning for their future. For more tips and resources, visit happinessinretirement.com or the Del Ceti Capital Management Facebook page. Until next time, here's to a happy, healthy, and financially secure retirement. Del Ceti Capital Management, LLC. Del Ceti is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Del Ceti and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.happinessinretirement.com. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.