Many of our clients come to us “around” retirement, which could mean the few years leading up to retirement, at retirement, or a few years after retirement. All three of these time segments may require a change in investment strategy. How dramatic the change is depends on several factors, including the current market conditions, outlooks, and spending needs in retirement.
For those individuals a few years away for retirement, they are typically the most affected by the current market conditions. If the market has recently had a major downturn, then they often may want to stay more heavily invested in equities (stocks) to recapture any losses or maximize gains before they retire. If the market has not corrected, then they may want to start filling in the first segment of their income distribution plan. They could do this by shifting some of their investments out of the market in anticipation of using those funds for living expenses in the first few years of retirement. You can’t afford to lose money on assets that you are currently living on in retirement because you may not have time to recoup those losses and therefore would need to alter your lifestyle to account for the lower portfolio value. This is known as sequence of return risk. In my opinion, it happens to be the single biggest risk to retirees. It’s the risk of losses in the early years of retirement, if unaccounted for, that can lead to you running out of money during your lifetime.
Our income plans account for sequence of return risk by removing the first 10 years of required income from major market fluctuations, thereby eliminating the possibility of a negative sequence of returns affecting income. For income required after 10 years, you can start to introduce more risk into the portfolio because you now have a longer time horizon that has the potential to make up market losses from early years.
For those individuals who are ready to retire, they may likely need a complete overhaul of their portfolio since they are transitioning from “saving” to “spending”. This change requires a completely different mindset from trying to maximize returns when you were still working. The focus now is on both early-stage retirement income and late-stage growth so that the portfolio can last as long as possible. The focus should shift from rate of return to sequence of return. This is when we build out the entire projected income distribution plan while still accounting for changes in circumstances. Maximum flexibility has to be designed into the plan because as we all know, nothing in life goes the way we plan. I often ask, did everything in the last 25+ years go exactly the way you intended? When they stop laughing, they understand why we need this flexibility.
Lastly, for those individuals who are already retired, the biggest challenge I face with this group is often getting them to spend enough money. They often have made their portfolios overly conservative out of a fear of losing money and in doing so they may end up hurting themselves by limiting their income. This is often the result of simply not knowing how much they can take from a portfolio each year and not having a way to measure their progress. We design our income plans so that retirees know exactly how much money they should have every year in retirement. If you don’t know how much you should have, then you can’t possible know whether or not your portfolio is on track to last throughout your lifetime. This is why retirees underspend. Because they don’t know where they should be, they are frequently stressed out about spending and err on the side of caution and spend too little. Having an income distribution plan that tells them exactly where they should be each year helps eliminates that stress and makes retirement far more enjoyable! To learn more, register for our Enjoyable Retirement SolutionTM seminar on May 12th by visiting https://www.reichassetmanagement.com/events.