Retirement is a penultimate goal for most, it not all, people. It represents a life phase when they finally are able to have the option to not have to work. It is a time of renewed relationships and travel unconstrained from ‘unused’ vacation days.
But at the same time, for those retirees relying primarily on income from their portfolio, it can be anxiety-inducing. How do I know I won’t run out of money? How do I know this is a ‘safe’ amount to withdraw?
One common strategy has been to bucket a retirement income portfolio for 3 time segments:
0 to 5 years
6 to 10 years
But what if instead of time segmented an income portfolio was event segmented? Instead of aligned to time frames the retirement income portfolio is aligned to events such as: 1: Recurring monthly expenses, 2: Travel 3: Health-related care (costs exceeding health insurance)?
A benefit to an event segmented strategy is that spending is more clearly defined. This likely would result in more peace of mind because we can more clearly align the spending to the income source.
An event segmented strategy can also result in spending down a retirement income portfolio while not running out money vs. spending down a retirement income portfolio to not run out of money.
The risk to either a time segmented or an event segmented approach is not keeping a strategic focus on the overall retirement income portfolio. Put another way, to not allow mental accounting to creep in.
Mental accounting creeps in when a retirement income portfolio is not approached holistically. When, instead of seeing the various accounts and investments as parts of a cogent financial plan, they are instead viewed in uncorrelated silos, resulting in some accounts psychologically more valued than others.
I know this sounds contradictory: Isn’t segmenting a retirement income portfolio, either by time or event, the same as mental accounting?
No, because the approaches are fundamentally different, and that is the key.
Mental accounting derives from transaction-based emotional responses to money, whereas time segmented or event segmented portfolio strategies always keep the overall financial plan in mind.
This can be an esoteric way to think about a retirement income portfolio, but the core is having a financial plan encompassing the whole portfolio and quarantining it from the illogical rationale of mental accounting.