Over the last several years, American investors have become well-acquainted with a nebulous and vaguely threatening question about their retirement plans: "What's your number?"

The question, which many large retirement plan providers (and others) have introduced into the lexicon as a means of spurring investors to sock more money away, can come across as simultaneously menacing and overly simplistic.

The truth is that no single dollar amount can guarantee that an investor will not outlive his or her retirement assets. And while it's useful for Americans to have a goal in mind as they save for retirement, they need to be aware that amassing the assets is only the first part of a successful game plan for their post-career lives. In order to make sure those retirement savings accomplish their mission, clients need to have a solid distribution strategy, as well -- a blueprint for how and when those assets will be put to use.


On the surface, distributing assets during retirement may seem like a no-brainer: Simply sell a set percentage of the retirement assets each month to generate enough cash to meet the retiree's needs. In practice, however, this approach can actually lead to the worst results.

By selling a fixed percentage of an investor's assets each month and then rebalancing according to a set allocation model, investors can end up selling long-term assets -- which they will need to generate ongoing returns for the later stages of their retirement -- much too soon. The result, in many cases, is a portfolio that fails to keep up with cash flow needs over the long term.

The ideal distribution plan, in contrast, has a couple of key features: It must provide for an investor's near- to medium-term cash flow needs while also giving long-term assets time to grow.

Put another way, you need an approach that matches short-term assets with short-term liabilities and long-term assets with long-term liabilities. The plan should also be flexible enough to adjust to market conditions and an investor's changing needs, while insulating the client from risk and volatility during retirement to the extent possible.


In our experience, the approach that is best suited for meeting all of the goals above is one many advisors are familiar with, known as the time segmentation strategy. The basic feature of the strategy is that it separates investors' assets into two or more buckets dedicated to addressing clients' needs at different points during retirement.

Naturally, the details of the bucket strategy vary from advisor to advisor. In structuring these strategies for clients, we have found that the crucial element is balance: The plan should be comprehensive enough to meet investors' income needs throughout retirement, yet simple enough that clients understand it and feel a sense of ownership about the strategy.

By implementing an approach to retirement saving and investing that is goals-based, rather than performance-based, advisors can help clients feel more prepared for retirement and help them commit to the game plan over the long term.


In our case, we start by developing a detailed understanding of a client's cash flow needs in retirement. We do not allocate assets to any of the buckets -- much less start thinking about specific investments -- until we have a firm grasp on the amount of income the client will need each month throughout his or her retirement.

Once we have a clear picture of the client's income needs, we separate the retirement assets into three general buckets.

The first focuses on providing income for investors through the first seven years of retirement. It's further divided into two sub-buckets: One designed to produce a low-risk income stream through contract-based investment vehicles such as variable and fixed annuities, and another with very low-risk instruments such as short-term Treasuries or even cash.

We refer to the second bucket as the "relative safety" bucket. This pool of assets consists of investments with slightly higher return potential than in the first bucket; the mix may include bonds, balanced portfolios and stocks that pay high dividends. This bucket is designed to generate cash for years 8 through 15 of the client's retirement, as well as to supplement any shortfall in income needs during the first seven years.

The third bucket is aimed at appreciating over the client's first 15 years of retirement and thereby providing cash flow for years 16 and beyond. We typically divide it as well, with part of it aimed at growth and income -- investing in low-correlated assets including real estate and other conservative alternative investments that are suitable for the client. The other part tends to go into equities, which over time offer the highest potential for long-term appreciation.

We isolate equity investments from the client's sources of near-term income -- hoping to give clients confidence that their monthly expenses will be taken care of regardless of short-term market swings. The approach also lets them to take a long-term view toward asset appreciation, giving the investments in the third bucket the time they need to grow.


While targeting a specific number may be a good way for clients to keep themselves on a disciplined, regular savings plan, it's important to communicate to them that a number is not a guarantee. If you approach asset distribution in the same rigid way once retirement starts, the clients' assets might not end up covering their liabilities after all.

A thoughtful, flexible strategy can help investors understand that every dollar of their retirement savings has a specific time frame and a specific purpose. And it can prepare them to deal with retirement by helping them commit to a goals-based investment and distribution strategy.

In the end, that may mean greater peace of mind for both clients and advisors.

Christine Tang, CFP, CWS, and Anh Tran, Esq., CWS, are co-founders of Modern Wealth Advisors in Irvine, Calif.

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