Retirees and pre-retirees often are caught in a dilemma regarding major purchases and home maintenance expenses. Now that I'm in that stage of life and we need a new roof, I feel the question and its implications.
What is the big deal really? Well, we begin to realize the significance of every dollar. Once a dollar is spent, it cannot be reclaimed and most important, it will not generate an income for the future.
Let's work the math. If I liquidate shares to generate a $20,000 withdrawal, I am not making a $20,000 decision. Missing out on 20 years of dividends and potential gains is the opportunity cost of my new roof. So, it becomes a basic time value of money decision that could dramatically impact your life for years to come.
So often we focus on the worth of our portfolio and how much we have gained or lost over a specific time period. In retirement there are a couple other metrics that are crucial. First, how many shares do I own? Second, what income are those shares generating? Reducing the amount of shares by forced liquidation will impact the potential of income from your investments, regardless of your portfolio value.
However, we still need a new roof.....so what are the options? This is best answered in a meeting with your financial advisor. Here are a few ideas to discuss at your next meeting:
- If you have time, could some of the income from your portfolio move into an "escrow" account for the major expenditure? If you need every dollar to meet monthly bills, then this may not be an option. Could you make some changes in your portfolio to increase the income from each share? This will obviously lead to additional risks and volatility that may not appeal to you.
- Another possibility is waiting for some excess returns so you can harvest gains from your portfolio to meet the goal. Again, the assumption here is that you have some time prior to needing the cash.
- Consider using excess cash on hand. We all have a comfort level for our emergency fund. If the expenditure is immediate, using some or all of your emergency fund may be the best option. After the fact, execute a game plan to replenish the cash reserves.
- A full net worth statement may reveal some assets available that you tend to overlook. An example, life insurance cash value. As we retire, there are adjustments we make to our risk management and that may free up some "lazy cash" from a life insurance policy.
- Last, of course, is the potential of using credit. This has long-term implications as well. Our best advice is to avoid taking on new debt in retirement whenever possible. If it is the only option, make sure you have a strong plan for repayment.
Making decisions like these should not be taken lightly. Consult with all of your advisors. There are potential tax implications for some of these ideas. Please consult with your CPA. It is always good to get your "brain trust" in a room, present the problem and let them brainstorm solutions. Our Compass advisors are always ready for conversations like this!