Recently a headline in an industry publication got my attention. It screamed, “Sinking at Retirement”; proclaiming that this is the worst possible time to retire. Reason being the length of time the bull market has been going on and equity valuations are high. To say that I was shocked and disappointed in the article would be a dramatic understatement.
While the article made some good points regarding how the sequence of returns (especially in the early years of retirement) can have a huge impact over the long-term it left out some critical concepts that experienced professional financial advisors know and use effectively with their clients. White Oaks in the Insight section has explored the concept of the sequence of return on multiple occasions including “Pursuing the Perfect Portfolio Design” a three-part series and another three-part series “Taming the Risk Monster”. In Alternative Investment: How Less is More” reducing volatility concepts to reduce the sequence of returns risk were also explored.
Careful planning and a plan objectively crafted highlights the probability of retirement. While not an absolute guarantee that nothing will go wrong it won’t rely on an optimistic outcome based on asset values being high. We all know that investment markets fluctuate and market timing is a futile exercise. Those considering retiring, without considering the all but guaranteed market pullbacks, are market timing in the worst possible way.
Proper scenario planning for high probability retirement outcomes include:
Inflation: While inflation has been low for quite some time the trend is showing signs of inflation rising over the next few years. A standard of living being reduced regularly due to rising costs of food, taxes, etc. is not fun.
Taxes: I have seen many plans fail miserably due to a maniacal focus on reducing taxes to zero. Focus on expected after-tax returns. It’s how much you have left that you can spend. Deferral of income in retirement needs to be considered carefully. Deferral strategies often have a “gotcha” later on. Look over the long-term and what you can spend.
Modern Diversification: Many advisors follow a process called “Modern Portfolio Theory” that came from a paper entitled “Portfolio Selection” by Professor Harry Markowitz. Professor Markowitz wrote the paper in 1952 and later won the Nobel Prize in Economics for his work. At the core was that the asset classes chosen had more to do with the results achieved than the individual security selection. The work was based on stocks, bonds and cash as the investment vehicles.
Now, 66 years later too many consider their investment choices to be limited to stocks, bonds, and cash. While the Modern Portfolio Theory was a vital and important part of the evolution of portfolio design, new and proven concepts are available to reduce volatility and deliver reasonable returns. Ignoring these opportunities increases not reduces the sequence of return problem.
Too Smart: There are too many stories of people who retire and make disastrous investment decisions, losing huge sums of money. Others, decide to invest exclusively in bank accounts and/or bonds and see their lifestyles erode away due to increasing costs and no way to keep up.
The notion of a bad time to retire, let alone do anything, smacks of poor or incomplete planning. A plan is not successful because a number is achieved. It is successful when multiple scenarios are planned for and strategies are put in place to mitigate the impact. Financial security is having a plan to meet you goals and dreams in spite of obstacles. Let us know if we can help.