First of all, I want to wish each every one of our readers and their families a very Merry Christmas. Since the season of giving is upon us, I want to try to give you some helpful guidance in thinking about income during retirement.
The most common question I receive is whether a client’s savings are going to generate enough income to last for their lifetime. Our income and the longevity of it is important to both living and giving (in whatever fashion that means to each of you) through retirement.
For many, this thought brings angst in the sense that they may have never thought about it in-depth or they may have thought about it and just never followed through on investigating how it applies to their situation specifically. So let me ask you, do you have a specific plan addressing the question of your retirement income, where it will come from and the likelihood of whether it will last? Is there a written strategy to address this? What are the positives and negatives to the solution? A good fiduciary firm can help you with these questions and I will tell you that there is no time like the present to address this important part of your financial plan.
What I see most often is people simply retiring with investments of various types, mostly subject to the risks of the financial markets, but who haven’t evaluated and coordinated this risk with the rest of their financial plan (investments, taxes, income, insurance, etc). Unfortunately, they don’t consider how this risk and lack of planning could affect their income longevity and how to seek mitigation of those risks effectively.
Many say that they “need” the higher returns so they have to have the risk to make it through retirement. Although this could be true, it is seldom the case and if it’s never been appropriately evaluated specifically to your unique situation it is at best a guess. Let me ask you, how much market risk (or let’s more appropriately describe it as risk of loss) do you really need in retirement? What rate of return goal do you need for your specific financial plan? Let me give you an example of the dangers of not addressing investment risk specifically in relation to retirement income.
Let’s assume that you are one of those I mentioned above who believes they need all the risk of the market to successfully navigate retirement and ignores planning around all other areas (like what your withdrawal rate should be). We will further assume you go full bore and simply choose the passive return of the S&P index (1) including dividends (that is, no risk management). You retire with $1,000,000 and want to draw income of $80,000 per year and inflation is 4%. Like most folks, we’ll assume your assets are withdrawn from retirement accounts (IRA, 401k, etc.) at an effective income tax rate of 20%. Historically speaking, the results by year of retirement might look like this:
Retire in 1980 – After 30 years you are successful and have ~$700,000. Congratulations!
Retire in 1990 – After 16 years you run out of money. Plan failure. Uh oh!
Retire in 2000 – After 6 years you run out of money. Plan failure. Oh my!
Successful Investor Benjamin Graham in his book ‘The Intelligent Investor’ said, “Successful investing is about the management of risk…” Note, he did not say the management of returns. He also had this to say, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go”. Did you get that last part? What income plan and investment discipline are you leaning on? Do you have one? Do you understand it and its implications to you? Has your advisor discussed volatility and drawdown in your portfolio to set appropriate expectations? What’s your next Bear Market exit strategy or the lack thereof? Will you simply ride it out after the example I’ve just given you? Big returns are great but big losses can ruin your day.
Folks, we are many years into a bull market and have seen extreme volatility to the up and downside in one of the best economies in quite some time by many measures. However, with recessionary signals on the horizon, not evaluating your risks in regards to investments and how it will affect income in retirement is a big mistake. Especially, if you are close to or have started retirement distributions. We can help you with this. Give us a call for your no obligation review today. It would be a great way to end the year and begin the new with a fresh understanding of what challenges your retirement plan may or may not have! I’ll see you soon. Blessings.