3 Key Decisions So Clients Don't Wreck Retirement In Year 1

Chances are, within the first 12 months that a client transitions from work to retirement, they will want to spend their savings on trying new things. Trouble is blowing too much money can result in missing out on stock market returns.

“The decisions you make at this dicey and vital juncture, many of which are irrevocable, will profoundly affect your financial security and your lifestyle for the next 30 to 40 years,” said Ray LeVitre, advisor and author of  20 Retirement Decisions You Need to Make Right Now.

Deciding how much play money to set aside for first-year retirees is one of three key decisions advisors can help their clients to make within 12 months of leaving their careers. The danger is that over spending will collide with a bear market.

“We model for them what would happen to the entire portfolio if the worst years in the stock market occur in year one, two or three year,” said Jana Lisle Parham, senior vice president with UBS Wealth Management in Tennessee. “It’s money they will never gain back because of where the market was when money was withdrawn in the first year.”

Some 46 percent of seniors spend more money during their first two years of retirement than during their working years, according to an Employee Benefit Research Institute report. As a result, financial advisors are increasingly setting aside extra money for their recently retired clients to freely overspend so as not to upset the entire portfolio.

Parham, a financial advisor, creates for clients three buckets. One is for liquidity in year one, two and three. The second is for longevity and the third for legacy or heirs.

“I try to help them understand what a big spend in the first year would do to the entire portfolio,” said Parham.

The second key decision to make in the first 12 months of retiring, according to LeVitre, is how to structure the client’s investment portfolio. Without such decision-making in the first year, a client’s portfolio runs the risk of depletion too soon.

A 50/50 stock and bond portfolio is one way to go, given the fact that balanced portfolios rebounded within one year in 2008, according to Net Worth Advisory Group data.

“We put money the client will need to cover expenses during the first one to two years in a money market account and a one-year CD,” LeVitre said. “We invest money the client will spend in years three to ten in bonds or bond funds and we invest money that won’t be used for more than 10 years in stocks or stock funds.”