Filosophical Insight_Client Update

Worked Hard, Saved, Now What?

You have worked hard and saved; you’re ready for the next phase of your life. Now what?  You want to protect your hard earned dollars, but more importantly, you want to protect the life you have dreamed of and worked so hard to make a reality.
There are several components that determine the needs of your retirement portfolio:
We, as a society, are living longer, thus requiring more from our retirement dollars
A generation ago, retirement started at age 65 and the average span of retirement for a retiree was much shorter, less than 20 years.  Once retirement was reached we were asking portfolios to merely preserve our spending power and keep pace with inflation. The goal was to accumulate assets, which most people did over a 40 year work career, and then take those assets, invest in bonds or conservative investments, and have the assets doled out over 20 years.
Under this constraint, a million dollars in retirement funds was not only was a sign of success and prestige, but was a mark that allowed for minimal stress on the portfolio. Your money had worked just as hard as you had during your career, and now the portfolio, like you, could simply sit back and rest.  There has been a shift in what retirement portfolios must do to achieve our retirement goals.
Welcome to the 21st century.  We, as a society, may still be working for 40 years, although the Baby Boomer generation is pushing to an earlier retirement and totally re-defining retirement in their early to mid 50’s. The difference is that we are living much longer. Today, it’s not uncommon to hear about people living into their 90’s, and most retirement plans are calculated out to age 95 or 100.  What does this mean in terms of retirement?
With the previous generation, the focus was largely on accumulation: build the nest egg by age 65. After all, if you reach the million dollar mark, and in retirement, your investments at least matched inflation, you could spend $50,000 (adjusted for inflation) a year over 20 years.
While the accumulation focus is still in place, what has changed is the role of the portfolio once retirement is reached. Now the portfolio is a tool that is vital to meeting the income goal needs for the next chapter of life. With the retirement phase of life now almost as long as the accumulation (work) phase of life, this means that the portfolio must continue to grow in retirement at such a rate as to not to fatigue, exhaust, or overly exert the portfolio.

The biggest mistakes made by those about to retire
Flight to “safety” of fixed income investments
The market drop of 2000 and the collapse of WorldCom and Enron has people concerned about owning a large percentage of equities. No one wants to work hard and save, only to see their portfolio disappear due to a major negative market movement. Therefore, as individuals near retirement, there is a propensity to run out of equities and into the safety of fixed income streams. While fixed income will produce an income stream, the question is, will the income stream meet inflationary pressures? If not, then inflation will slowly eat away at your portfolio over time.
Income streams are important, but unless the portfolio has accumulated a very large sum, growth cannot be ignored. A 100% fixed income portfolio may deliver certainty of income in the near term, It does not ensure that there will be enough income in future to support your lifestyle.
Fatiguing the portfolio
It is not uncommon for those entering this major lifestyle change to want funds for a dream vacation or other items that they have put off until retirement. These would likely be one-time withdrawals. The problem with some encounters is that they have a portfolio structured for say a 5% return but want to withdrawal funds at 20% a year. This will not last long.  The portfolio will become fatigued, and a lifestyle change would be required to prevent the portfolio from becoming completely exhausted.
Is your portfolio in shape for your retirement?
Retirement has changed with the Baby Boomer generation. It is more about making work optional, not needing the work to sustain the full cost of your new lifestyle.
What does these mean for your portfolio?   
This means that all the years of accumulation have ended, and now it's time for funds to come out of the portfolio. Is the portfolio in the financial shape to withstand the exertion of permanent loss of funds?
Once money is removed from the portfolio, it is considered spent and forever removed from future growth, leaving the portfolio with fewer funds to meet future income needs in subsequent years.
How do you ensure that the portfolio will meet your retirement lifestyle?
Simple! Withdrawal less than the portfolio is earning each year. Doing this creates a growing portfolio. Even a withdrawal rate that equals the earnings of the portfolio will keep the portfolio meeting your lifestyle needs.
How is this done?
Just as the definition of retirement and your lifestyle in this stage of life has changed so has the style and nature of how your portfolio is structured in retirement.  For the majority of the portfolio, this means that there cannot be an immediate flight to the “safety” of bonds or fixed income streams as in the past.
The portfolio will need to continue to have components of growth in the structure of the portfolio.
The fear
Having a large percentage of your portfolio in the stock market evokes fear and panic. Markets can go down.  If the market goes down, will I have less money to support my lifestyle?
Yes, markets do fluctuate.  The key to withstanding the fluctuations of the market is to separate the income needs over a period of time from the portion of the portfolio that is exposed to the market.  This isolates the immediate future income needs from the ups and downs of the market, but still allows the majority of the portfolio to continue to grow at rates beyond inflation.  This ensures the availability of future withdrawals. Instead of immediately switching from an equity portfolio to a fixed income portfolio, a certain percentage of funds would be separated out of the equity component.
Not only does a portfolio require growth components, those growth components need to be diversified. Holding equities in too few asset classes or regions of the world makes the portfolio vulnerable to changes in that sector. We can not predict the future, but we do know that not all asset class or sectors of the world move together. Therefore, spreading out the equity (growth) portion of the portfolio reduces the chances of having your portfolio reduced due to the changes of one or two asset classes.
So you have worked hard, are about to retire, or thinking of retiring in a few years. You understand that you need growth in your portfolio, that you want your short term cash removed from the fluctuation of the market. How do you do this?
The answer to that question is dependent of a number of factors concerning how retirement lifestyle.  I would be happy to sit with you and discuss your situation.
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  • Worked Hard, Saved, Now What?
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