I was asked to weigh in for a recent Investor’s Business Daily piece built around new research from Vanguard on how retirees turn a lump sum into income that lasts. It’s the same question I answer for clients every week, so I was glad to add a perspective to it.
For your whole working life, the scoreboard is your account balance. Once you retire, the question changes to something harder, whether that balance can produce steady income that holds up when the market has a rough stretch.
The research behind the article lays out a framework for that shift: Cover essential monthly bills with guaranteed sources first, things like Social Security, a pension, or an annuity, then fill whatever gap remains with your own savings at a withdrawal rate built to last thirty years. It’s a useful way to think about the problem, and it matches a lot of what I already do with clients.
The thing I told IBD is the same thing I tell clients here. We keep about three years of expenses in cash and bonds. That way nobody is ever forced to sell stocks at a low point just to cover the month’s bills. Bonds tend to hold their value and even climb when stocks sell off, since investors get nervous and move toward safety. Cash doesn’t move at all day to day, though I’m upfront with clients that inflation slowly wears at its value over time.
It’s a small idea that sets clients up for smooth sailing during down times. Corrections happen more often than people expect. Historically the S&P 500 has seen a 10% drop roughly every 18 to 19 months, and at least one 5% dip in almost any given year. When you already know three years of income is sitting in the safer part of your portfolio, a down market stops feeling like something you have to act on. You leave your stocks alone and give them room to recover, which historically they have. Since 1946, a 10-20% downturn has taken about 4 months to recover on average, and a deeper 20-40% downturn has taken closer to 14 months.
The buffer is only one piece of the bigger picture, though. Filling that funding gap well also means thinking through which accounts to draw from first, since taxable, traditional, and Roth accounts all get taxed differently, and the order matters. It means looking at Social Security timing, since claiming early locks in a smaller check for life while waiting can raise it. None of that happens in one meeting. I sit down with every retirement income client once a year to walk through the plan together, because markets shift, spending needs shift, and a plan that never gets revisited stops being much of a plan.
Grateful to Adam Shell and IBD for including CJM in the conversation. Click here to read the full piece, including the Vanguard research it’s built on.
Parker G. Trasborg, CFP®, is a Senior Vice President, Financial Adviser, and Principal at CJM Wealth Advisers.
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