2.3 million retirement withdrawal plan gets a Moneyist warning

A $2.3 million retirement withdrawal plan is the flashpoint in a new MarketWatch Moneyist column, after a reader said their financial adviser recommended flexibility rather than a fixed drawdown plan before Social Security begins.

Quentin Fottrell, who writes The Moneyist for MarketWatch, told the reader they were right to want clearer answers now. The reader, nearing age 64½ with a severance package, said they plan to claim Social Security at 70, when the benefit is projected at about $4,200 a month, or about 78% of that amount if taken earlier.

The reader laid out a sizable but complicated mix of assets: $450,000 in a Roth IRA, $500,000 in a traditional IRA, $425,000 in Eli Lilly stock with a very low cost basis, $550,000 in inherited taxable investments, $200,000 in a money-market fund for home improvements, $80,000 in another money-market fund for unknown expenses and a future car, and $85,000 in an inherited non-spousal IRA with required withdrawals starting next year.

Do I need a retirement withdrawal plan?

Fottrell’s answer was that flexibility can be useful, especially when taxes, employment and markets are unsettled, but it does not replace a plan for where spending money will come from if stocks fall. Sequence-of-returns risk means early retirement losses can hurt more because withdrawals may force an investor to sell assets when prices are down.

The adviser, according to the reader, suggested lining up several possible funding sources rather than deciding in advance where each future dollar would come from. Fottrell said that may help with tax timing, but he pressed the practical question: if markets sink after the first year, what pays for years two through five?

MarketWatch’s column noted the reader already has $280,000 in money-market funds. Fottrell wrote that someone who needs 5½ years of bridge spending before Social Security may want cash, Treasurys, CDs or short-term bonds set aside, especially if annual spending is around $100,000.

He also flagged the tax trade-offs around withdrawing from a traditional IRA or inherited IRA during a bear market. Fottrell said possible reasons could include being in a low tax bracket, doing Roth conversions, meeting required minimum distributions or satisfying inherited IRA withdrawal deadlines, but he said the adviser should be able to spell out when those choices would make sense.

Why the $700,000 hedge strategy raised concerns

The reader said the adviser wanted to manage $700,000 through a proprietary equity hedge strategy, plus other actively traded and fixed-income sleeves. The proposed structure included $300,000 of taxable assets in a hedge strategy holding 25 to 40 stocks and using an inverse ETF, $150,000 in a taxable actively traded equity strategy, and $250,000 of the Roth IRA in another actively traded equity strategy.

Fottrell said that part of the proposal gave him pause. He described a proprietary hedge approach as a private strategy that can use stocks and hedging tools to try to limit losses, but said investors may have less visibility into the models, risks, costs and likely performance.

He also said hedging can drag on returns, especially when markets rise, and can be hard for an investor to test across different conditions. Put options and similar tools may cost money to maintain, according to the column.

Fottrell advised the reader to ask direct questions about fees, track record, what portion of returns comes from hedging versus stock selection, and whether cheaper ETFs could produce similar results. His bottom line: the adviser’s proposal had left the reader with too many unanswered questions.

This story draws on original reporting from MarketWatch.