How to Manage Your Wealth During Retirement

Without a regular paycheck, retirees need to have a process in place for managing their wealth and spending during retirement.

One potential approach is to have different portfolios to cover different types of expenses. See Figure.

A near-term portfolio can hold sufficient cash and cash equivalents to cover one to three years' worth of expenses that may not be met by retirement income sources such as government pension or annuity payments. An intermediate-term portfolio can then be used to cover expenses for the remainder of the retirement while the long-term portfolio can be set aside for health care or long-term care expenses late in life, or wealth that is intended to be a family legacy.

Following such an approach, the intermediate-term portfolio will need to provide a balance of current income to replenish the near-term portfolio and capital appreciation to keep pace with inflation over time to meet future spending needs.

Only focusing on yield may not be optimal as investments that generate the highest yield may not provide the greatest total return over time. Solutions that offer a fixed payout can sometimes end up lowering the value of your principal over time. This is particularly so in instances when the target payout cannot be met from a combination of dividends, interest and capital appreciation – requiring the principal to be tapped instead. Hence while you may receive your desired payout, a lower principal amount means there is less wealth available to meet future needs.

In evaluating income-oriented solutions, clarify how much of the payout comes from dividends, interest versus capital appreciation or principal. The chart below shows that total returns are higher over time when dividends are reinvested.

Even after your plan has been put into action, it is a good practice to revisit your investment strategy at least once a year with your financial advisor. Use these sessions to review and update your spending needs and replenish the near-term portfolio with dividends and interest. You can also rebalance your intermediate-term and long-term portfolios and evaluate potential investment opportunities.

Source: J.P. Morgan Asset Management. The original Retirement Insights paper is titled "Timing retirement – A guide to determining when, and how, to retire" and can be found on J.P. Morgan Asset Management's website.