Investments to draw upon after retirement

Here is one approach to deciding which investments to draw upon in retirement. It's based on a typical retirement portfolio consisting of:

  • Short-term investments in a sufficient amount to fund a year or two of retirement spending. This allows you to keep some money very safe, although the retiree may want to draw against bonds or stocks to meet current spending needs as described below,
  • Bonds and bond funds of varying (laddered) maturities, primarily for income, and
  • Stocks and stock funds diversified across the major investment categories, primarily for growth.

Source of withdrawal depending on market conditions. Since the income earned from dividends and interest is probably insufficient to meet spending needs, a retiree is forced to sell some investments to fill the gap. Which ones, though? There is a smart way to decide which ones, rather than simply randomly selling off a stock or bond or mutual fund or selling stocks and bonds pro rata, or ridding yourself of a lousy performing stock or bond or mutual fund. Here are the decision rules:

  1. If the stock market has risen, liquidate stocks to meet living expenses. This forces you to "sell high," in other words sell stocks after the stock market has risen which is exactly what successful investors have done forever.

  2. If the stock market is down, liquidate bonds to meet living expenses. While the temptation to sell stocks after they've declined can be extreme, retirees should give the stocks time to regain value. Otherwise, they're reducing investments with growth potential at the worst time.

  3. In years when investment returns are very low or negative, try to reduce the amount withdrawn. This is a tough thing to do, and may not be possible. But if a retiree fears running out of money because of poor investment performance, one way to reduce the possibility is to make a temporary mid-course spending reduction.