It is not about beating the market
During the accumulation stage, the goal is to gather as much money as possible. So it is natural that the focus is on getting the highest return on your investments that you possibly can. If you are interviewing financial planners with your parents, you will quickly learn that they don't promise to give you the highest returns. Most will explicitly tell you that they won't consistently beat the market. Instead, they will talk about maximizing the likelihood that your parents can maintain the lifestyle they would like for the rest of their lives.
Spend the time to think through the investment decisions that are driven by this new goal. For round numbers, I am going to assume the parents need $100,000 per year from their savings to meet their lifestyle needs. If they have $1.5M in their retirement account, the traditional recommendation of a retirement portfolio of 60% stocks and 40% bonds represents just a 39% chance of success according to FIREcalc.com, one of my favorite free tools for analyzing the expected performance of retirement investments. In this case, moving up to 100% stocks increases the likelihood of success to 52.4%. On the other hand, a retiree who has saved $2.5M to meet the 4% rule will have a likelihood of success of 95.2% with a 60/40 split compared with slightly lower 93.7% with a 100% stock portfolio.
Pre-Tax, Post-Tax, and Required Minimum Distributions
The tax code has created a surprising variety of different retirement accounts including the traditional IRA, Roth IRA, 401(k), 403(b), and 457(b). The key distinction to keep in mind is pre-tax money and post-tax money. The traditional IRA is the classic example of a pre-tax account. Money is taken out of your paycheck before you pay taxes and put into the retirement account. You pay taxes when you take this money out. A Roth IRA is the classic example of a post-tax account. You pay taxes before you put the money in the account, but it grows tax-free.
In addition to having to pay taxes as you take money out of a pre-tax account for spending, there is another very special feature of pre-tax accounts: required minimum distributions (RMDs). Starting the year the retiree turns 73, they must withdraw a prescribed amount from the account even if they don't want or need the money. The amount they need to withdraw starts out at 4% and increases each year. A quick rule of thumb is to subtract their age from 100 and divide the money in the account by that number to determine how much they have to withdraw. So at 85, they will have to withdraw 1/(100-85) of the account or about 6.5%. By 90 it is approximately 10%.
It is important to take the RMD each year by withdrawing at the least the minimum amount from your retirement accounts because the IRS can levy penalties of up to 25% of the RMD that wasn't taken, but in practice the bank that handles your retirement accounts will generally make it very easy to withdraw your RMDs and difficult for you to ignore the guidance to do so. Still, it is important to plan for these RMDs to minimize income taxes. It can be counterintuitive, but it often makes sense to take out more than you need even before RMDs to minimize the taxes you will owe in later years.
The Go-Go Years, the Slow-Go Years, and the No-Go Years
Most people assume that retirement spending is flat without really thinking about it. After all, when we are saving for retirement, we think about how much we want to be able to spend and often use the 4% rule or one of its cousins to calculate how much money we will need. Michael Stein proposed an alternative model in his 1998 book "The Prosperous Retirement: Guide to the New Reality." The first years of retirement are the go-go years where people spend money on travel and activities they didn't have time to do during their working life. Their spending may even be higher than it was during their working years. As energy and health decline, people spend less during the slow-go years. In the no-go years, expenses rise not because they are traveling, but because their care expenses increase.
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