As I started reading this Smart Money article it seemed to be similar to the dozens of writings I read each week in search of information that will benefit your retirement analysis. It didn’t take long to realize that several points made relate directly to information from our pension series that was recently completed. I’d like to point out the similarities to add weight to my pension analysis and give you the opportunity to see it from a different angle. Read the article here.
While you are working, a regular paycheck allows you to ride out market volatility- the key here is to realize that you’ve had steady income while saving for retirement. That gives you flexibility with investments so periodic volatility doesn’t affect your lifestyle or spending patterns. Income in retirement should be no different.
Once you retire, you can’t afford to wait for bear markets to recover- with a majority of assets exposed to market risk, you’ll no doubt see disappointing performance at some point. That will mean constant spending adjustments to keep from running out of money.
Diversified portfolios work if you have a long time horizon and don’t need the money- the lower your income needs are in relation to your level of assets, the more shock your portfolio can absorb. Regardless, taking withdrawals from a battered portfolio is never an efficient way to manage money as it forces you to sell assets at rock-bottom prices during bear markets.
The job of financial management in retirement is more difficult when trying to plan for income, tax reduction and assett growth regardless of market conditions. It’s not really that much harder but does take a different line of critical thinking.
How will you produce income in retirement?There are far too many associated risks with simply attaching a withdrawal rate to savings.
What happens when the market enters a down-cycle?With proper guarantees in place, lifestyle adjustments won’t be necessary during inconvenient market periods.
What is my probability of success?Consider how your retirement income portfolio would have performed in the past. Also take note of what your investment experience has been in the past. You’ve experienced long-term growth but also experienced disappointing losses. Be sure to design a plan that takes all contingencies into account.