I'm a Financial Planner: This Layered Approach for Your Retirement Money Can Help Lower Your Stress

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Retirement confidence doesn't come from having unlimited wealth. It comes from having a money structure that provides clarity, security and flexibility regardless of what markets or life throws at you.

Research from Morningstar shows that retirees with clear financial frameworks report significantly lower stress levels than those with equivalent assets but no organizational system.

The most confident retirees don't simply hold a diversified portfolio and hope for the best. They build their money into distinct layers, each serving a specific purpose and time horizon.

This structure creates psychological security while aiming to maintain the growth needed to fund 30-plus years of retirement.

The three-layer framework

The foundation of confident retirement money management is segmentation. Rather than viewing retirement savings as a single pool that must somehow last decades, successful retirees mentally and often literally divide assets into three layers with distinct purposes.

Layer 1: Guaranteed income foundation (lifetime coverage)

The first layer establishes a floor of guaranteed lifetime income that covers essential expenses: housing, utilities, food, health care, insurance and basic transportation. This foundation provides security regardless of market conditions.

Primary sources:

Social Security. The cornerstone of guaranteed income for most retirees. Confident retirees typically delay claiming until age 70 to maximize this inflation-adjusted lifetime benefit.

Pensions. Increasingly rare, but those with pension benefits typically elect lifetime annuity options rather than lump sums, prioritizing certainty over control.

Immediate annuities. Some confident retirees convert a portion of assets into immediate annuities to fill gaps between Social Security and essential spending needs. While annuities have drawbacks (illiquidity, inflation risk if not indexed, counterparty risk), they provide certainty.

The target: guaranteed income covering 60% to 80% of essential retirement expenses. If Social Security provides $40,000 annually and essential expenses total $65,000, the $25,000 gap might be filled with a pension or annuity, or funded from Layer 2 with high confidence.

Studies show that retirees with guaranteed income covering most essential expenses are more likely to report high levels of financial security than those relying entirely on portfolio withdrawals that fluctuate with markets.

Layer 2: Stability reserve (years 1-10)

The second layer covers the first decade of discretionary spending beyond what guaranteed income provides. This layer prioritizes capital preservation and liquidity over growth.

Typical composition:

Cash and cash equivalents (years 1-3). High-yield savings accounts, money market funds, Treasury bills, and short-term CDs covering two to four years of spending needs beyond guaranteed income. This provides relative certainty for near-term expenses.

Short to intermediate bonds (years 4-7). Individual bonds, bond ladders or short-duration bond funds providing modest income and higher yields than cash while maintaining relatively stable principal.

Conservative balanced funds (years 8-10). 40% to 50% stocks, 50% to 60% bonds, providing some growth potential while limiting volatility.

The psychological benefit of this layer cannot be overstated. When markets crash 30% to 40%, confident retirees don't panic because they know their next 10 years of spending are planned.

Their plan aims to never need to sell stocks at depressed prices to fund living expenses.

The structure also enables tax efficiency. In low-income years, retirees can tap this layer while executing Roth conversions. In high-income years, they might leave it alone and spend from taxable accounts, harvesting capital losses if available.

Layer 3: Growth portfolio (years 11-plus)

The third layer focuses on long-term growth to combat inflation and fund later retirement years. With a 10-year time horizon before needing these assets, confident retirees can weather significant volatility.

Typical composition:

Domestic stocks (40% to 50% of Layer 3). Diversified across large-cap, midcap, and small-cap through index funds or ETFs

International stocks (20% to 30%). Developed and emerging markets for global diversification

Real estate (10% to 15%). REITs providing inflation protection and income

Alternative investments (0% to 10%). Commodities, infrastructure or other diversifiers for sophisticated investors

The allocation within Layer 3 gradually becomes more conservative over time. A 65-year-old might hold 80% stocks in Layer 3, but by age 75, that might shift to 60% stocks as the time horizon shortens.

This layered approach creates what financial planners call a "glide path." Assets automatically become more conservative as you approach needing them, without requiring perfect market timing.

The withdrawal sequence strategy

Confident retirees don't just structure assets by time horizon. They follow strategic withdrawal sequences that seek to minimize taxes and maximize portfolio longevity.

Years 1-5 (early retirement, pre-Social Security)

Priority 1: Taxable accounts

• Withdraw from taxable brokerage accounts to fund living expenses
• Harvest capital gains strategically in the 0% capital gains bracket if income allows
• Use losses to offset gains for tax efficiency

Priority 2: Strategic Roth conversions

• Convert traditional IRA assets to Roth while in relatively low tax brackets
• Fill up the 12% or 22% bracket intentionally, paying taxes now to avoid higher rates later

Priority 3: Cash reserves

• Tap cash reserves as needed to bridge until Social Security

This sequence minimizes lifetime taxes by taking advantage of low-income years before Social Security begins.

Years 6-15 (Social Security claimed, before/early RMD

Priority 1: Social Security

• Provides inflation-adjusted guaranteed income base

Priority 2: Qualified charitable distributions (if applicable)

• After age 70½, donate directly from IRAs to charity via QCDs, satisfying RMD requirements without increasing taxable income

Priority 3: Proportional withdrawals from taxable and tax-deferred accounts

• Balance withdrawals to manage tax brackets
• Continue Roth conversions if marginal rates allow

Priority 4: Roth withdrawals only if needed to avoid jumping tax brackets

• Preserve Roth assets as long as possible for maximum tax-free growth

Years 16-plus (RMD period)

Priority 1: RMDs

• Required minimum distributions must be taken from traditional IRAs and 401(k)s starting at age 73
• These are forced, so plan other income around them

Priority 2: QCDs

• Donate RMD amounts directly to charity if charitably inclined, keeping taxable income lower

Priority 3: Taxable accounts

• Fund additional spending needs from taxable accounts

Priority 4: Roth withdrawals

• Tap Roth accounts only as needed, preserving them for maximum tax-free growth and estate planning benefits

Research shows that optimal withdrawal sequencing can extend portfolio longevity by more than three years — a substantial benefit that compounds over decades.

The rebalancing system

Confident retirees rebalance systematically, but they use withdrawals and deposits strategically to minimize taxes and transaction costs.

The approach:

Review quarterly, rebalance annually or when drifts exceed 5%. Check asset allocation every quarter but only rebalance when positions have drifted significantly from targets.

Use distributions to rebalance. When taking withdrawals, sell overweighted positions. This accomplishes rebalancing without generating unnecessary capital gains.

Use incoming cash flow to rebalance. Social Security, RMDs, dividends and interest can be directed to underweighted positions rather than being automatically reinvested proportionally.

Tax-loss harvest in taxable accounts. Sell losing positions, immediately replace with similar (but not identical) investments, and use losses to offset gains elsewhere in the portfolio.

Avoid trading in tax-deferred accounts when possible. IRA and 401(k) trades don't trigger immediate taxes, but excessive trading fees still erode returns. Minimize turnover.

The communication and review cadence

Perhaps most important, confident retirees establish regular review schedules with their advisers or implement self-review systems if managing independently.

Quarterly reviews:

• Portfolio performance vs benchmarks
• Spending vs budget
• Any life changes affecting planning (health, family, goals)
• Rebalancing assessment

Annual reviews:

• Comprehensive financial plan update
• Tax planning for the upcoming year
• Social Security and Medicare optimization
• Estate plan check-in
• Withdrawal strategy confirmation

Major life event reviews:

• Health changes
• Family changes (births, deaths, marriages, divorces)
• Inheritance or windfall
• Major market events (20%-plus declines or gains)
• Tax law changes

The review cadence itself creates confidence. Retirees who check portfolios daily often make emotional decisions. Those who review systematically stay disciplined while remaining informed.

The flexibility buffer

Every confident retiree maintains what financial planners call a "flexibility buffer" — planned discretionary spending that can be reduced if markets underperform without affecting lifestyle satisfaction.

Examples:

• Travel budget. $15,000 annually, but can be reduced to $8,000 to $10,000 if needed
• Gifts to family. $10,000 annually, but can be reduced or skipped temporarily
• Entertainment and hobbies. $8,000 annually, but can be scaled back if necessary

The key: These aren't expenses you want to cut, but ones you could cut for one to three years during a severe bear market without meaningfully affecting your happiness. Having this flexibility identified in advance prevents panic during downturns.

The documentation system

Confident retirees maintain clear, accessible documentation that they and their spouses can reference:

The one-page summary:

• Total assets by account type (taxable, traditional IRA, Roth IRA, etc.)
• Current withdrawal rate and spending budget
• Guaranteed income sources and amounts
• Key adviser contacts and account numbers

The withdrawal plan:

• Which accounts to tap in what order
• Target annual withdrawal amount
• Tax considerations

The investment policy statement:

• Target asset allocation across layers
• Rebalancing triggers and rules
• Acceptable investments and strategies
• What to do during market crashes (usually: Stick to the plan)

This documentation prevents confusion, ensures both spouses understand the plan and provides guidance during stressful periods when emotional decision-making is tempting.

The common thread

Retirees with confidence don't have more money. They have more structure. They've divided a complex 30-year financial challenge into manageable layers with clear purposes.

They've established systematic processes for withdrawals, rebalancing and reviews. They've documented their plans and communicated them clearly.

The structure creates confidence because it answers the questions that create anxiety:

• What if markets crash? (Layers 1 and 2 cover the next decade)
• What if I spend too much? (Clear budgets separate essential from discretionary)
• What if I run out? (Conservative withdrawal rates and flexibility buffers provide margin)
• What if tax laws change? (The layered structure provides withdrawal flexibility)

Building this structure takes time and often requires professional guidance. But once established, it transforms retirement from a constant source of worry into a period when money becomes background infrastructure supporting the life you want to live.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.