If you think all money is the same, you’re not looking closely enough at your funds. Here’s an example from a client I recently met. A retiree, let’s call him “John,” insisted on leaving some of his money in his 401(k) after leaving the workforce shortly before 2008. In retirement, John needed to draw on his savings to cover a bill larger than what he had on hand in his CDs and a savings account. To make up the shortfall, he drew from his 401(k). Although he paid his bill, John was disappointed to learn that getting his money meant the fund sponsor sold assets when the value was down more than 30 percent.
Retirees aren’t often aware that a lot of 401(k) plans take pro-rata distributions from a fund. Whereas, most participants, would like to pick which assets they can sell to cover their distribution.
Here’s another example. A retiree I know put all of her money into accounts (e.g., corporate bonds, convertible securities or a money market deposit account) for generating a fixed-income. She then faced a medical emergency. Her only choice was to draw on a nest egg designed to create a steady income. While she paid for her unplanned expense, her withdrawal will have an effect on the amount of income she can generate annually for the rest of her life.
People often see their retirement money as if it’s the same. Most of us have seen the financial commercials that ask, “What’s your number?” In other words, “How much money do you need to retire?” Answering that question is a challenge, sometimes a complex one. That’s because not all of the assets you’ve accumulated while employed will be used for the same purpose, at the same time. Simply put, accumulating money requires a different strategy than distributing it.
How does your distribution strategy differ from your accumulation strategy? Do you have a distribution strategy?
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