The transition from saver to spender can be psychologically challenging for retirees who are no longer receiving a stable paycheck or making regular contributions. Many retirees struggle to spend their nest egg intentionally while wondering whether it will truly last 20 or 30 years in retirement.
One factor that may affect how long a portfolio lasts is investment costs. Dollars lost to fees are funds that can no longer compound and support future income. With additional risks such as market volatility, inflation, or unexpected medical costs, minimizing unnecessary costs can go a long way in helping retirees preserve and sustain their wealth.
Explore low-cost strategies you can use in retirement to help reduce portfolio drag, promote continued growth, and maintain income flexibility.
The Case for Low-Cost Vehicles (ETFs and Beyond)
While they may appear minimal, investment costs compounded over decades can significantly eat into your savings, reducing how much you can spend each year. Exchange-traded funds (ETFs) are a common savings vehicle retirees use, as they’re typically lower-cost than other mutual funds and provide broad diversification across industries and markets. In addition to being affordable risk management tools, here’s why ETFs are different:
- Lost-Cost Diversification: Passive ETFs track a preset market index, such as the S&P 500, and offer investors broad exposure to companies across various industries and markets. Fees can remain low because investors aren’t purchasing dozens of individual securities, nor are they paying for the active management of the fund.
- Fewer Internal Fees: ETFs tend to have fewer internal transactions and active trading, which often generate fees.
- Fewer Capital Gains: Fewer trading transactions also result in fewer capital gains distributions, making ETFs especially effective in tax-advantaged brokerage accounts to preserve after-tax returns.
In addition to choosing a low-cost investment vehicle, strategically designing your portfolio can help reduce costs and preserve wealth. This is when professional guidance can help retirees:
- Accessing Lower-Cost Funds: Financial advisory firms and larger investors often have access to lower-cost versions of funds that track standard indexes, offering the same level of diversification and market exposure at lower internal costs.
- Reducing Overlap: Partnering with a financial advisor can help avoid overlap, for example, when holding multiple funds that invest in the same companies. Common with a do-it-yourself approach, this often leads to redundant fees and exposure that doesn’t enhance diversification.
- Ongoing Guidance: Inclusive with many wealth management services, advisors will continually monitor investments for tax efficiency, considering different account types and tax treatments. These reviews can provide clients with additional insights and options into other low-cost and savings strategies, such as index mutual funds, treasury bonds, and more.
Managing Risk in the “Red Zone”
The “Red Zone” is within five years of retirement, when retirees must account for sequence of returns risk: a market downturn occurring early in retirement, as new income distributions begin. Selling during a market dip often has a reverse compounding effect that can be damaging to future withdrawals and portfolio sustainability. This is a danger zone, in which retirees have less time to recover from negative returns than they did during their working years.
To address this and other risks, the decumulation phase requires retirees to shift from maximum-growth strategies to a focus on stability and longevity. We guide clients through withdrawal strategies and low-risk assets that can help support their goals, including:
- The Bucket Approach: This strategy divides assets into three buckets based on time horizon and purpose: cash, taxable brokerage accounts, and tax-advantaged retirement accounts. The first bucket is dedicated to stable liquid assets, such as cash, that retirees can use to help cover expenses in early retirement. Low-risk assets, like cash, have lower growth potential but can serve as a buffer when stocks decline, giving retirees flexibility and allowing their portfolios more time to recover rather than selling at a loss. Learn more about the bucket approach and other decumulation strategies in this blog post.
- Fixed-Income Rebalancing: Retirees can consider shifting to more stable bonds or Treasuries to provide an additional source of income when equities are down.
- The Goldilocks Zone: Balancing growth and stability is the key. At Blankinship & Foster, we help each retiree identify an income amount that supports their lifestyle goals without taking on unnecessary risk, especially during market volatility. We often focus on stable assets to meet short-term needs during market swings, while continuing to invest in long-term, growth-oriented assets that help outpace inflation.
The Psychology of the Market Cycle
Market swings often feel different in retirement. While working, fluctuations had less impact, with more time allotted to recover and continue compounding. Without a steady paycheck and regular savings contributions, retirees tend to focus on a shrinking balance, making “paper losses” especially stinging when there’s market volatility.
To help address this challenge, we guide our clients in organizing their assets by time horizon and purpose, so they clearly know that one pool of funds is intended for short-term needs, travel, or legacy planning, for example. This approach, combined with a structured, low-cost plan for spending, rebalancing, and investing, can help retirees stay disciplined and keep critical funds invested during volatile periods, rather than reacting to emotions or headlines.
Beyond the Numbers: Designing Your Ideal Retirement
Investing is only one part of the retirement planning equation. At Blankinship & Foster, we help pre-retirees and retirees build holistic plans that consider their goals, spending needs, taxes, and lifestyle. We also guide you through:
- Determining how much income your portfolio needs to generate to support your lifestyle
- Understanding the implications of how your assets are structured and taxed across different account types
- Identifying redundant or excessive costs that can be reduced or eliminated to preserve more after-tax returns
- Maximizing retirement benefits, such as Social Security and deductions, and coordinating withdrawals around timely strategies such as required minimum distributions
- Building a tax-efficient withdrawal strategy that supports longevity and accounts for changing market conditions
If you’re nearing retirement or have recently retired and want to learn strategies for reducing unnecessary costs and making the most of your hard-earned savings, please contact us.
We invite you to meet our team, learn more about what makes our firm different, and discover how we can help you build a retirement plan that balances growth, stability, and longevity.