Retirement income planning is one of those things that’s deceptively easy to describe and difficult to implement. Our approach goes something like this:
- Determine your retirement budget and then adjust it for expected inflation.
- Determine how much of your future income needs will be met from non-investment sources such as Social Security and pensions.
- Design an investment asset management and withdrawal plan (including a multi-“bucket” strategy where needed) to make up for the difference. If Social Security and pensions cover your expenses, then this part is not as critical and if you’re in such a position, you are a very lucky person.
We all have different needs so there are many variations on this theme but this general approach seems to work well for many people.
What could possibly be difficult about this? The answer, of course, is people. Specifically, it’s the fact that we are all emotional about our money and this gets reflected in the many, many ways in which people act irrationally and cause market volatility.
The thing nobody wants to do is retire right at the beginning of a sustained market downturn. Anyone who decided to retire on January 1, 2009 faced a very scary reality. Few things can make a person more irrational than watching 40% of their hard-earned nest egg disappear in a matter of months.
Of course, the nest egg only disappeared if that person actually sold out at the bottom. So, how can we stop ourselves from this kind of reaction? We need market growth in order to avoid having to eat cat food when we’re 88 but we can’t stomach the idea of a big portfolio loss just as we enter retirement.
One possible solution to this dilemma is to adjust a portfolio’s risk profile in the years around the beginning of retirement. A near-retiree can temporarily decrease the risks in their portfolio in the year or two before retirement. After they have been retired a few years, they can then look to take a little more risk if needed.
The term “risk” is something that isn’t always well-defined and it’s often confused with the idea of market volatility. For us, risk is the permanent impairment of capital. It’s obviously not something that can be completely removed from any portfolio but there are ways in which we try to lighten it up.
US Treasury Bills are generally considered to be the “risk-free” benchmark in the investing world. Unfortunately, those of us living in the world of Quantitative Easing and extremely easy money are stuck in a chronically low rate environment.
When we look to reduce risks, we often have to look in other directions. Those directions can include introducing new asset classes or eliminating existing exposures. They can also involve new investment vehicles altogether. For now we’re discussing a general strategy so we’re not going to get into details about specifics but there are things we use which we consider to be lower risk investments.
Besides moving to a different asset allocation, we can shift away from overvalued assets. These days that might be some of the sky-high internet and biotech stocks.
There are many different things we can change for each individual client but the bigger point here is that, if needed, you reduce risk as retirement approaches and stay there for a few years. Then, once you have retired and have a better feel for how your retirement will unfold, you can look to make portfolio adjustments intended to provide growth for future expenses.
We can’t see the future and we really can’t know how our retirement income stream will evolve. As much as we all like to see projections of future assets, there is almost zero chance those projections will be correct. They can only be used as guidelines and must be adjusted at least on an annual basis.
This particular strategy can be helpful in alleviating some of the uncertainty in a retirement income plan. It hopefully keeps us from having to endure a major portfolio correction as we near retirement but also allows us to re-orient toward growth as needed.
We can’t see the future and we really can’t know how our retirement income stream will evolve. As much as we all like to see projections of future assets, there is almost zero chance those projections will be correct. They can only be used as guidelines and must be adjusted at least on an annual basis.
This particular strategy can be helpful in alleviating some of the uncertainty in a retirement income plan. It hopefully keeps us from having to endure a major portfolio correction as we near retirement but also allows us to re-orient toward growth as needed.
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