As a financial planner, I have had some significant aha moments over the years working with clients approaching retirement. My biggest realization? Most people struggle with transitioning from building wealth to using it for income.
Here’s what I’ve discovered that might help you think differently about your retirement planning.
1. Remember Why You’re Accumulating
Most of us spend 30-40 years focused on the accumulation phase through our 401 (l)s, 403(b)s, TSPs, and other investment accounts. It’s exciting to watch your accounts grow, and during that accumulation phase, the rate of return is king.
But it’s easy for people to forget the whole point of building up money in these vehicles in the first place — you’re not building up money to let it grow endlessly. You’re accumulating so that you can eventually start drawing or shifting to the distribution phase. For most of us, the goal is to enjoy life by using that money for passive income to travel, help families, renovate homes, and buy vehicles. You’re building it up so that it can become a cash flow machine for you.
2. Guaranteed Income Helps Create Peace of Mind
A conference I attended several years ago completely changed my perspective. It was with a gentleman named Tom Hegna. He talked about his parents, who were schoolteachers with pensions, in contrast to his wife’s family, who had a lot of assets but no guaranteed income. What Tom said is that his parents were happy in retirement because they had enough guaranteed income to cover their cash flow needs, whereas his in-laws were constantly worried about market fluctuations.
Here’s what I’ve found being on the front lines: the more guaranteed income clients have, the less anxious they tend to be.
We work with many public servants — including teachers, administrators, and federal employees — who have robust pensions and Social Security benefits. Their investments are for discretionary expenses and the cherry on top of their sundae. It seems like they tend to worry less.
For those of us in the private sector without pensions, we must create that income using insurance products, such as annuities. Stocks, bonds, and mutual funds are great options, but they cannot offer the same guarantees that pensions provide.
3. Account for Sequence of Returns Risk
We’ve seen that it’s hard emotionally and psychologically for some clients to transition from the accumulation phase to the distribution phase.
As we discussed, watching accounts grow is a rush, but when you shift to distribution and start drawing money out, you face one of the most significant risks in retirement: the sequence of return risk.
What if the stock market drops and you’re drawing money out of stocks? Because stocks can fall significantly, if you must sell stocks during a downturn to generate income, you don’t benefit when the market recovers.
That is why we are advocates of The Bucket Plan®— a strategy that organizes your money when you need it. The income you need short-term (within 1 to 10 years) should largely come from cash and bonds. Stocks are for long-term needs. This approach helps protect you from being forced to sell investments at the wrong time.
Why This Matters
As you approach retirement, you must shift your focus to a reliable cash flow, rather than exclusively focusing on the rate of return. I’m not saying returns aren’t necessary; they’re just not the top factor they were in the accumulation stage.
At Harford Financial Group, our purpose is to provide holistic wealth management across five key areas of financial planning: retirement income and cash flow, tax management, asset management, asset protection, and estate planning. But our deeper reason is that when you have a solid plan, you tend to experience less stress and anxiety, gaining the peace of mind to live life with purpose.
That’s the true goal — so you can be your best self and create meaningful experiences with the people you love.
Do you have questions about making this transition in your planning? Let us know—we're here to help you transition confidently from building wealth to enjoying it.