In this episode of the podcast Long View, I had a conversation with Dana Anspach, who recently authored a book on retirement titled Living off Acorns: A guide to the four stages of retirement. We discussed topics related to the post-retirement phase, the risk of financial fraud, and, honestly, how tricky it can be to adjust to spending during retirement.
Here are some highlights from the conversation with Anspach, who is also the founder and CEO of a financial planning firm called Wise Money.
Prepare for significant market disturbances
Amy Arnott: Let’s explore the financial planning aspects in the retirement preparation phase. What do you mean by the “retirement red zone”? How can people mitigate risks in the years leading to retirement?
Dana Anspach: The retirement red zone refers to the five years before retirement and the first five years after. During this period, your investments are more susceptible to significant market fluctuations—like bear markets or underperforming portfolios over time. It’s interesting because exiting retirement at a strong market can lead to better long-term outcomes compared to retiring during a downturn. If you’re in a bear market when you want to retire, sure, you could delay for another year or two, but that’s not always feasible. So, one way to plan is to test your retirement strategy against historical downturns. Would my approach have worked if I retired in a bad year like 2008, 2009, or even earlier, like around 2000? Or perhaps during the 1960s, which were also tough?
It’s crucial to ask, “Did my retirement plan hold up?” This can bring a sense of peace. Even if it withstands the worst historical outcomes, it likely won’t push you into that worst-case scenario. I often find it puzzling when retirees act like it’s the Great Depression. Testing your plan can demonstrate that your strategy is sound and not necessarily facing a massive downturn. Thus, adjusting your spending habits during this time makes sense. Also, it’s important to prepare for unforeseen circumstances, knowing that typically, they don’t come to pass.
So, my approach involves long-term planning during the retirement red zone. Another aspect is behavioral risk. When adverse market events happen, do you tend to panic and cash out? Are you likely to abandon your strategy? I believe certain portfolio methods can help mitigate these risks. I’m a proponent of using a bucketing approach, where specific fixed-income cash deposits and bonds mature in line with your cash flow needs for the first 5-10 years. This can help people stick to their plans and alleviate stress. When the market dips, you’ll know where your funds are coming from. Viewing it over five years can be reassuring: I can plan for the next five years without needing to adjust my spending immediately. If we face another long-term bear market, I’ll have time to recalibrate…
Ultimately, retiring when the market is at its worst means you’ll have a different experience compared to when it’s at its peak. So how can we effectively design a portfolio to weather those challenging times?
Create your retirement ladder
Christine Benz: Let’s delve into the two-bucket strategy you discuss with clients, which is also in your book. Focusing on salary replacement buckets and growth buckets, can you elaborate on the salary replacement aspect? When should someone start building this during the initial planning stage?
Anspach: Those are complex questions, and they definitely vary among clients. There’s a strategy involving bucketing and total returns. In an ideal world, you’d kick off building your bond ladder around ten years prior to your intended retirement date. However, in a paper I published, it’s more about a fulfilling process rather than sticking to a strict timeframe for cash flow coverage. If I consider my retirement expectations and set personal benchmarks, I will sell stocks if I exceed those benchmarks. For instance, if I’m 55 now and plan to retire at 65 needing a withdrawal of, say, $80,000, I’d focus on that.
Therefore, I might sell some stocks today to purchase a maturing bond worth $80,000. It’s essential to factor in inflation, so that $80,000 reflects future needs, not just today’s value. This ensures my spending for the first year is secure. If the stock market rises, I can replicate the approach the following year. But if the market crashes and my portfolio suffers a setback, I wouldn’t add to my third year’s budget. By the time retirement rolls around, typically you could enter it with a structured ladder spanning five to eight years, depending on what you want to cover.
This process matters more than simply having a set amount for cash flow to reach retirement. Why? Because it allows you to adapt to fluctuating market conditions, which are largely unpredictable. Instead of rigid rules, it’s better to follow a flexible, guided approach.
