Drive for Show, but Putt for Dough


Think about the feeling when you hit that long, scorching, straight drive off the tee. You look on in admiration as the ball is fixed against the backdrop of the sky before it drops onto the fairway.


And yet that great feeling (and your score on the hole) will take a beating if you three putt.


Saving for retirement is similar. Accumulating assets during working years can give the same sense of satisfaction as that long drive off the tee box.  But it’s when income is drawn from investments that your level of success is determined.


Accumulate for Show


While you are working full-time you are focused on saving and investing and making the “pile of money” as big as possible. You have income from your job or business and continue to save. Market downturns may not bother you as much, since you are still working.  This is your accumulation phase.


Because no income is needed (you are usually adding to your accounts) the order of your investment returns each year is not as important as the return that you earn over your entire accumulation time.


But as we near retirement things change. We become less concerned about money we have accumulated and more anxious about the income our money provides.  Many people nearing retirement are uncertain of how to access the money they have saved, how much they can take out, and don’t have a plan to draw income in the “smartest” way possible.  This is the signal of the shift from accumulation planning to income planning.





What is Income Planning?


Income planning is the process of figuring out how much income is needed and putting together an investment plan and withdrawal strategy that gives the client the best chance of success. “Success” to most clients is defined as never running out of money.


While you would never use a driver on the putting green, I do see many cases where accumulation planning is used, but income planning is needed. This can be dangerous to your income stream.  Most stock brokers, financial advisors, and the financial press are consumed with accumulation planning and making the pile of money as big as possible.  A different strategy is required when you near your “last paycheck”.  Let me give you an example:  (All indices are unmanaged and investors cannot actually invest directly into an index.  Unlike investments, indices do not incur management fees, charges, or expenses.  Past performance is not indicative of future results)


The Standard & Poors 500® is an index of 500 of the largest companies in the United States diversified by industry class.  During the last bear market from 2000 to 2002 the Standard & Poors 500® dropped a total of 37.6%.  This meant $500,000 invested in the index would have dropped to $312,000 by the end of 2002.  Now if the $312,000 was left invested it would have grown back to a little over $541,000 by the end of 2006.  Not good by any stretch, but not necessarily devastating if no withdrawals were made (accumulation mode).


Now what if you needed income of $25,000 per year (5%) from this portfolio? How will this affect the $500,000?  Assuming a $25,000 withdrawal at the end of each year, the $500,000 dropped to a low of $250,290 by the end of 2002.  The account would have grown back to a balance of $315,951 at the end of 2006.  But while the original withdrawal of $25,000 was 5% of the $500,000 balance back in 2000, at the end of 2006 $25,000 makes up 7.9% of the remaining $315,951.  This withdrawal rate is too high and the account owner will likely have to choose between lowering their income level and running out of money.


Ask yourself: Do you know how much income you can “safely” withdraw from your investments? Are you taking your distributions in a way that minimizes your taxes?  Do you have an investment plan that can provide income during a down market?  How can you prevent drawing down the principal of your investments and still provide income?  Do you know the “best” account to draw your income from?  These are questions that must

be answered during income planning. The ability to access your money, principal preservation, pro-active tax planning, and income generation are keys to successful retirement income.


Income Plan for Dough!


So if you’ve done a great job of hitting long, straight, fairway drives (accumulated assets) and you are one or two putting nearly every green (income planning), you are in great shape.


But what if your tee shot went into the water, or you sliced it into the woods, what now? The key to saving the hole is to make the most of your remaining opportunities.  If you execute, you can actually score better than another golfer who had a great shot off the tee.


By using effective income planning you can compensate for not accumulating all that you’d hoped for. By making great decisions and “rallying back” it may be possible to meet your goal.  Your margin for error is smaller, it demands greater skill, but it can be done.  And when you achieve your retirement income dreams, it’s sweeter than hitting the perfect drive.