What is the time segmentation strategy for structuring retirement income?
Are you nearing retirement and feeling a little lost when it comes to how to best structure your income? You’re not alone.
One of the best-kept secrets for structuring retirement income is a strategy called Time Segmentation. It’s also been referred to as Time-Based Segmentation or The Bucket Method.
It’s likely that you’ve never heard of this because most generalist financial advisors are simply not experienced in it and therefore don’t offer this advanced strategy to their clients.
Time Segmentation is an incredibly powerful way to structure your retirement income, as it helps preserve the money you need in the near term while also growing assets for later down the road.
In this blog post, we’ll discuss what Time Segmentation is, why we believe it’s superior to other methods including the Four Percent Rule or Guaranteed Income Annuities, and how when done right it can help you mitigate risks such as inflation, longevity, bad investment climates, and more. We’ll also show you how personalized this method can be and give you a glimpse into what your income might look like over the course of your life.
If you’re within five years of retirement, we highly recommend that you look into this strategy!
How does the Time Segmentation method for retirement income work?
Time Segmentation is a retirement income planning strategy that involves segmenting your retirement portfolio into timeframes: near-term, mid-term, and long-term.
The idea is that you’ll use the near-term assets to fund your retirement income needs in the first five-to-ten years of retirement. The mid-term assets will be divided into segments to be used for the next five-to-fifteen years, and any remaining money is invested in long-term growth investments with the goal of safeguarding retirement from longevity risks and/or increased long-term care costs later in life.
Each segment of your portfolio is allocated differently. The near-term assets are held in conservative investments with the goal of preserving capital. The next corresponding segments progressively ladder up their growth-seeking potential in order to achieve a return goal for that segment of your retirement.
As you move through your retirement years, you periodically replenish the short-term buckets with money from your long-term buckets, allowing those long-term investments to continue growing while continuing to safeguard the money you will need to access in the next phase of your retirement.
By segmenting your assets in this way, you can reduce risk while still taking advantage of potentially higher returns from investments with a longer time horizon.
Ultimately, you’ll have a path to secure a reliable source of income that will last throughout your retirement years.
How does Time Segmentation compare to other income planning strategies?
Time segmentation offers many advantages over traditional methods, such as the 4% Rule (Sustainable Withdrawal) or Guaranteed Income Annuities.
First, Time Segmentation provides more flexibility and control over your income. You have the ability to adjust or move funds around as needed, without being forced into a fixed amount of money for a set period of time. This is in contrast to Guaranteed Income Annuity strategies which have preset formulas and are often not flexible when it comes to making adjustments.
Second, it allows you to tailor your risk level to fit your current retirement situation. You can take more risks with buckets that are further out in the future, as you’ll have more time for growth and recovery if necessary. From a behavioral finance perspective, this helps to reduce the great amount of stress one feels from watching their entire retirement savings participate in the ebbs and flows of the stock market.
Thirdly, this strategy helps to safeguard you from inflation, longevity risk (outliving your money), and bad investment climates. Diversifying across different types of investments and focusing on long-term growth in your later segments ensures you have a strategy designed to last for the long haul.
Popular methods like the 4% Rule for sustainable withdrawal expose you to too much risk. Retirement should not be spent white-knuckled watching the stock market.
Note: There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment.
Finally, strategies like the 4% Rule rely heavily on the stock market and may be subject to significant losses in the event of a downturn. With Time Segmentation, you are better safeguarded against those risks.
If you are using the 4% method for sustainable withdrawal and you hit a market downturn within your first ten years of retirement, you could face a significant decrease in your withdrawal amount over the entire course of your life and a major impact on the longevity of your money.
This is called the Sequence of Return Risk. The 4% Rule exposes you to this, and it’s one of the biggest risks you will face in retirement.
If you retire in a year when the market is down 20%, your first year’s withdrawal would be $40,000. But due to that 20% market decline combined with your withdrawal, your portfolio would now be worth only $768,000 at the end of the first year.
Now let’s say the market continues on a decline in the second year and is down another 15%. In year two, your planned withdrawal would be $41,200 ($40,000 + 3% increase for inflation). So after the withdrawal and the market decline, your portfolio will be worth $618,000 at the end of the second year.
At the beginning of year three, if you took your planned distribution of $42,436 ($41,200 + 3% increase for inflation), your remaining portfolio value would be $575,000. So you’re now starting year three with almost half of what you started with just 24 months earlier. That’s scary because your retirement is just starting and you hopefully have a lot of time ahead of you, but now you only have about half of the money with which you started.
Even if the market improves during the next year, you are not likely to recover to anywhere near where you started. And if the market falls once again, your portfolio will be even smaller, resulting in an even greater risk of running out of money during your retirement.
Unfortunately, this is a very real scenario for many pre-retirees. In fact, it’s one of the biggest fears people have about retirement. At our firm, we call this the Luck Factor™. It’s either good luck retiring in a good market, or bad luck retiring in a bad market.
The good news is that although The Sequence of Return Risk is still a risk with Time Segmentation, this strategy can help you safeguard against it.
It’s for all these reasons and more that we believe Time Segmentation is a superior option for structuring your retirement income compared to other methods. By taking advantage of the Time Segmentation strategy, you will create a structured path to enjoy a comfortable retirement with more financial freedom and security.
Who can Time Segmentation help?
Time Segmentation is an ideal strategy for retirees who want a stable income over the long term but also want to continue to grow their assets so they can enjoy a more comfortable retirement without worrying about running out of money.
This method will help anyone looking for more control, flexibility, and security in their retirement plan. With its vastly customizable nature, it can be tailored to fit an individual’s unique needs and goals.
To make the most of this method, you do need to have at least $500,000 in retirement savings or more so that you have the resources to divide into segments. You also need to be comfortable with the potential risks associated with investing in the stock market for your long-term investments.
How can you implement a time-segmented strategy for retirement income?
Because the Time Segmentation method for structuring retirement income is an advanced planning strategy, it is not easy to implement on your own.
By working with an experienced financial advisor who specializes in this strategy, you can create a retirement income plan that is tailored to address the specific risks and challenges you may face in retirement.
At Hunt Country Wealth Management, we have built our entire firm around helping people across the nation access this strategy.
Our popular Sovereign Series™ Retirement Plan offers a step-by-step framework that helps you navigate the process so you can ensure your plan is structured and implemented to provide you with a strong financial foundation for the rest of your life.
If you would like to learn more about Time Segmentation, our step-by-step framework, and also explore some of the income planning methods we discussed in this article, enroll in our free mini-course called Retirement Basecamp™.
In this free, self-directed course you will:
- Learn what to think about as you approach retirement.
- Get a preview of common options for you to consider when creating income from your resources.
- Understand the risks you will need to address while retirement planning.
- Access our step-by-step framework to create your own retirement plan.
Join from your desktop, tablet, or smartphone.
Thank you for reading about Time Segmentation, an important part of planning your retirement income. We hope this blog post has been helpful, and we look forward to hearing from you!
If you have any questions or would like to learn more, please don’t hesitate to reach out. We are here and happy to help!
We wish you all the best in your retirement planning journey!
Chris Merchant, CFP® Fiduciary
Retirement Specialist and Founder of Hunt Country Wealth Management