Retirement Strategy Tips For Every Generation

Anthony Watson |

No matter your generation, retirement is a reality we all will face, whether voluntary or forced.  Following are retirement strategy tips to consider at every stage of life to improve your potential retirement outcomes.

Strategy For All Generations

Let’s start with a strategy that applies to all generations first.

Minimize Your Total Cost of Investing  

There are two components to your total cost of investing: 1). your portfolio’s weighted average expense ratio, and 2). your financial advisor’s management fee (if you use one).

Every mutual fund or exchange-traded fund charges what’s known as an expense ratio.  A fund’s expense ratio is not a fee you have to pay; rather, it is the amount of your return the fund company needs to hold back to pay their expenses.  Expense ratios can be as low as 0.02% or as high as 3.00% or more in some cases.  Expense ratios can end up taking a massive bite out of your return if they are not watched and managed.  To figure out your weighted average expense ratio, you will need to look up each holding you have in your portfolio and the weight of that holding to calculate your weighted average.  

The second component of your total cost of investing is your financial advisor’s management fee (if applicable).  I believe advisors add value to their clients in many ways, but the price you pay for that value can vary greatly.  Taking the time to understand how your advisor is compensated, if you don’t already know, will help you determine this component.  Some advisors charge commissions, some charge a % of assets under management, and some a flat fee.  See our Insight entitled "Why a Flat-Fee Advisor is Best for Retirees" for more.

Your total cost of investing acts as a drag on your returns and takes away from your portfolio’s compounding power.  Adding even 1.0% of return to your portfolio per year by cutting costs means a great deal to your portfolio’s value as the savings is continuously compounded over many years.  To a retiree, a 1.0% cost savings could mean a 25% increase in retirement income assuming a 4% withdrawal rate.  Your total cost of investing matters a great deal.  See our Insight entitled "Total Cost of Investing -- The Easiest of Retirement Optimization Strategies" for more.

Strategies for Gen Z and Millennials

Members of Generation Z were born between 1995 and 2012 making the oldest of the generation 27 years old.  Millennials were born between 1980 and 1994 and are today between the ages of 28 and 42.  Following are two retirement strategies to consider to optimize potential retirement outcomes:

Fund Your Roth IRA After You Max Your Company's Matching Provision

Ideally, you should first seek to max out your employer’s matching provision in your 401(k) or 403(b).  The priority should then switch to maxing out your Roth IRA funding (up to $6,000).  After maxing out your Roth IRA funding, your priority can shift back to maxing out the rest of your 401(k) contribution.

While you are young and early in your career, a Roth IRA can be a great savings vehicle because you are most likely earning less and being taxed at a lower marginal income tax rate than you will be later.  The ability to contribute to a Roth IRA gets phased out at an Adjusted Gross Income of $129,000 if single and $204,000 for couples.  Placing high-growth assets like stocks in a Roth IRA earlier in life can put retirement savers in a great position later in life by giving them a sizeable tax-free income source to fund retirement.  This tax-free source of income can be combined with qualified retirement account income from your 401(k) and 403(b) in retirement to craft an optimized tax-efficient withdrawal coordination strategy, which can add tremendous value to your retirement situation.  

Hold Less Bonds in Your Portfolio

Generally speaking, you should hold more stock and less bonds in your portfolio.  Young people often choose to hold bonds in their portfolio because they think it provides them with needed diversification.  This is not so when you have a lifetime of “human capital” to put to work.  Your human capital is the present value of your lifetime of wage earnings, which is steady “bond-like” income.  The ability to work for steady pay and make steady contributions to an investment portfolio over time more than serves the role bonds would play in the portfolio.  It is not until later in life that bonds need to be considered when one’s human capital value starts to diminish.

Strategies for Gen X

Members of Generation X were born between 1965 and 1979 and are today between the ages of 43 and 57.  Following are three retirement strategies to consider to optimize potential retirement outcomes:

Avoid Concentrated Risk by Diversifying Your Portfolio

As Gen Xer’s are progressing through their careers and their portfolios become larger, the management of those portfolios become more important as they start thinking about retirement.  Diversification becomes more important, as does avoiding concentrated bets as there is less time to recover from any mistakes at this stage.  Diversification is an often-misunderstood concept.  Someone with just a single index fund could be more diversified than someone with 100 individual holdings.  Diversification is not about the number of holdings but rather the asset class exposures each holding represents.  I believe there are nine distinct asset classes a person should be exposed to be maximally diversified: 

  1. U.S. Total Stock Market
  2. U.S. REITs
  3. Developed Stock Markets Europe
  4. Developed Stock Markets Asia-Pacific
  5. Emerging Markets Stock
  6. U.S. Total Bond Market (investment grade)
  7. Total International Bond Market (investment grade and U.S. dollar hedged)
  8. U.S. TIPs
  9. U.S High Yield Corporate Bonds (non-investment grade)

See our Insight entitled "Building an Investment Portfolio for Retirement" for more.

Avoid Alternative Investments

Some Gen Xer's may make enough money to meet the requirements necessary to be deemed an Accredited Investor.  Being an Accredited Investor gives you access to complex investments like hedge funds, private equity, and other alternative asset investments.  The wealth management industry makes a boatload of money off these investment products.  Just because you have access to these “exclusive” and “impressive” sounding investment opportunities doesn’t mean you should seek to invest.  Alternative assets such as hedge funds and private equity are complex, loosely regulated, opaque, and expensive investments that most often fail to yield a return commensurate with their true risk and are best to be avoided. 

Employ Asset Location

Asset location is a strategy whereby you hold certain types of assets in certain accounts to maximize each account type’s tax benefits. Rather than creating a balanced portfolio in every account, you can view all of your assets and accounts as one aggregated portfolio. Place capital growth assets, like stocks, in taxable accounts because they will grow fastest, and when they get taxed, it will be at the lower capital gains rates. Holding stocks in a Roth account is even better, where there is no tax period on the growth. Holding bonds in a Roth account would be a waste of that account type’s advantage. Income-producing assets, like bonds and REITs, are best held in retirement accounts, so their income distribution can grow tax-deferred rather than becoming immediately taxable as they would if held in a taxable account.

Strategies for Baby Boomers 

Baby Boomers were born between 1946 to 1964 and are today between the ages of 58 and 76.  Following are three retirement strategies to consider to optimize potential retirement outcomes:

Don't Blindly Follow the 4% Rule

Don’t blindly follow rules of thumb like the “4% Rule”, which is an overly conservative rule of thumb based on a set of rigid and simplistic assumptions that often leads an individual to sacrifice quality of life while living, only to leave a larger than planned legacy at passing. Following the “4% rule” in all periods but the one starting in 1966 would have led to a lot of money remaining on the table upon passing beyond what was planned.  That is money that could have been used to maximize happiness and contentment while living.  As a rule of thumb, the biggest flaw is it presumes that retirees cannot make adjustments, and this is just not true.  The level and degree to which a retiree can make adjustments will differ given each retiree’s unique circumstance, but most times, there is at least a little room for adjustments.

Adopt Dynamic Withdrawal Rules

Consider adopting dynamic withdrawal rules (aka flexible spending rules).  Dynamic withdrawal rules are highly customizable and allow a retiree to adjust their spending levels higher over time if they are willing to decrease their spending by some amount temporarily during periods of poor market returns.  Flexible spending rules can actually increase the amount of money you can take from portfolios while also lowering the risk of the plan failing. See our Insight entitled "Determining and Implementing Dynamic Withdrawal Rules" for more.

Strategically Coordinate Account Withdrawals

Manage your taxable income by strategically coordinating account withdrawals that optimize the realizing (or not realizing) of specific categories of income in an attempt to minimize your tax situation in any given year.  Managing taxable income is complicated stuff, is uniquely personal, and there aren’t any hard and fast rules to follow.  Strategies will vary from person to person and even year to year for the same person.  The trick is to build a habit of projecting taxes and looking for tax opportunities before the end of each year to make it work.  A Roth IRA conversion strategy often lies at the heart of an optimized withdrawal plan.  Most financial advisors have software that helps them to model and determine the most optimal scenarios given an individual's resources and circumstance.  See our Insight entitled "Strategies to Manage Taxes in Retirement" for more.

If you would like help implementing any of these strategies, we stand by ready to help.  To learn more, you can schedule a date and time that is convenient for you here at this link: or contact us here at any time.