You can control your retirement — even if you can't control Trump

Planning for retirement should be joyous — an opportunity to explore what could be 30+ years of after-work adventure. But it can also be scary, both emotionally and financially.   

Emotionally, you have a professional identity that’s going to change. It takes time to envision yourself retired. Some people don’t ever want to make the switch from corporate executive to cookie-baking grandma. Give yourself grace to do what works for you. 

Financially, it’s especially scary to retire, even if you have saved dutifully. The five years leading to and immediately following retirement are a danger zone for your portfolio due to two specific risks called "sequence of returns" risk and "sequence of inflation" risk.  

Sequence of returns risk refers to the possibility of distributing money from your portfolio when the market is down due to the random order of good/bad market returns.  Sequence of inflation risk refers to the possibility of distributing money from your portfolio to cover expenses in a period when inflation is high. These risks are really bad luck because you don’t control the economic conditions in the year in which you retire.  

Both of these risks will cause you to take more in initial distributions than, perhaps, your portfolio can bear and still last until you are 100 years old. Your planning goal is to prevent running out of money by preparing for down markets and elevated inflation.  After all, in your lifetime both of these conditions have happened and are likely to happen again. 

If you reduce those risks, you will certainly be less stressed. 

Buffer cash and create “buckets” 

Use the years leading to retirement to build a cash and near-cash “buffer” in high-yield savings accounts, CDs and money market funds. These financial tools all have different characteristics. But what they have in common is that they are not sensitive to market fluctuations. This is your short-term bucket. 

Do this by calculating, in advance, the money you will need to cover your lifestyle needs so you can avoid taking money out of the market when it’s down. Start with your fixed monthly expenses and deduct any pension, planned Social Security benefit or other stream of income.  The remainder, multiplied by 24 months, is your recommended cash buffer size.

Did you plan on a celebratory indulgence or a trip upon retiring? Set that money aside in your cash buffer, too — at least a year in advance. 

We expect down markets to occur twice a decade. Thus, in 30 years of retirement, you could see these six or more times. A short-term bucket that enables you to wait out the market for up to two years is usually enough time for it to drop and then recover. You will be able to sit out the entire nerve-wracking cycle. 

At intervals, you’ll refill your short-term bucket with dividends, interest and the gains from your long-term portfolios — a different bucket. While it takes practice to manage a two-year cash buffer, it prevents unnecessarily locking in market losses by taking distributions in a down market. 

Plan on part-time employment 

Waking up retired is a shock to the system, and one that requires preparation. One way to mitigate uncertainty about whether you want to retire in any particular year is to moonlight part-time, set up a consultancy or otherwise turn a hobby into a paying gig before you actually need the income.    

You won’t know if you are going to be caught in a corporate layoff, forced to leave work due to caregiving responsibilities or want to hold off on distribution of your portfolio for a year or two to let the market return to an upward trend. Life comes at you fast, as they say. Whenever there is market uncertainty, it’s good to think about how else you might produce income and keep it simmering on the back burner. 

As a matter of fact, if you’ve reached your Social Security Full Retirement Age and have begun collecting your benefit, consider intentionally retiring to a part-time job that earns enough so that you are technically “retired” but not yet distributing your assets. This is the best of both worlds — retired but not spending down your assets. 

And if part of your identity is built on your professional credentials and reputation, just having that consulting “shingle” set up online can make you feel good about yourself as you transition from your full-time role.  

Do Roth conversions early, mortgage payoff late 

There’s some questionable advice out there from famous money gurus. Don’t take it. Suze Orman’s retirement book says you must always pay off your mortgage just before retirement and recommends using Roth IRA dollars to do so. That’s crazy. 

Your Roth IRA is the money you use last in retirement, because you want it to grow tax-free longest. It’s the best money to compound because you have paid all the tax you will ever pay when you made your contribution. And it’s the money you want your beneficiaries to inherit because it’s tax-free to them, too. 

There is a body of research that indicates you can, mathematically, convert Traditional IRA dollars to Roth IRA dollars in your first few years of retirement and optimize your tax bracket. But that math doesn’t take into account the emotional toll of paying taxes out of savings and  of sequence of returns risk.  

The earlier you make any Roth conversions in your IRAs and pay the taxes out of income, the happier you will be. I tell my members to pick a dollar amount to convert every year in your 50s and just get it done so that, as you retire, you don’t need to make any unnecessary distributions. Of course, if you have a source of extra income in retirement, you can always use that to pay the taxes on Roth conversions. 

If you’ve missed the opportunity to convert, don’t sweat it. The market and your visible income may present other opportunities after you’ve been retired for a few years and you’re out of the danger zone. 

Next, do not be in a rush to use your portfolio to pay off your mortgage. Be patient. If you have a low-interest mortgage, wait until you get beyond the first few years and then pay off the mortgage, if you choose. You certainly don’t want to pay off your 3% mortgage when your retirement portfolio is -10%. Then you’d be overpaying from your portfolio to satisfy the debt. 

As a CFP® professional, I know how emotionally fraught these decisions are.  And, while there is no one-size-fits-all advice, waiting to distribute extra money from your portfolio benefits you in the long run by mitigating the two risks from which no money move can protect you. 

Create a personal model 

Financial planning models were once strictly the purview of financial advisers. That’s no longer true. You can and should avail yourself of a personal planning model. It will enable you to change your assumptions and control your financial outcome by showing you how your decisions impact your portfolio in any market. 

If you can’t live in the style to which you are accustomed to the age of 100, what options do you have?  

With a model, you can explore part-time work, changing when you claim your Social Security benefit, saving more or spending less. I use Boldin for my subscribers and my own plan. (As in "you should be bold in retirement.") 

When you take control of your assumptions, you will have less stress because there are fewer unknowns.   

The sooner you begin, the calmer you’ll be 

If you are nearing retirement, your best bet is to ensure you start building your cash buffer so that it will enable you to wait out a rocky stock market. Then set up that consultancy, Etsy shop or other part-time gig. Remember that the date on which you leave your employment and the date on which you begin distributions may be two different dates. And, finally, use a model to change your assumptions in the event that the market or inflation environment means you need to correct your course.