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Tag: "FL retirement"

Outliers And Retirement Income

[ 0 ] April 23, 2014

Spectrum Financial Solutions, FL, Retirement PlanningYou are age 65 and it’s your first day of retirement. You are about to tap a putt into the ninth hole. Based on your experience, you believe you will sink the putt.

Just to make it interesting, let’s make a little bet. If you sink the putt, you are guaranteed that you can take out an ever-increasing amount of money from your retirement assets and you’ll never run out of money in retirement—even if you live past age 100. However, if you miss the putt and the ball winds up on a completely different fairway, your money runs out before you’re age 80. Do you take the bet?

Wall Street makes a lot of investment projections calculating sustainable rates of withdrawal in retirement. Depending on the mix of stocks and bonds—and the initial withdrawal rate used—these predict that the invested money will last at least 30 years 90, 94 or 98 percent of the time. In golf terms what the projections are saying is you can move your ball closer or farther from the pin to wherever you think you’re pretty sure you could sink it, and the farther you go back from the hole, the larger the withdrawals promised. Essentially you are controlling the risk and the game because it is your decision on how much to withdraw and how to invest guided by the Wall Street model.

Let’s go back to the golf course and consider this: Unbeknownst to you, a hawk has mistaken the ball for prey and will swoop it up before it hits the hole, or a miss-hit ball from the adjacent fairway is arcing toward your green, smashes into your ball and sends it ricocheting onto the next fairway. In both cases you have lost your bet, and instead of enjoying a long and prospering retirement you will experience one with financial hardships.

We have all heard of black swans—disruptive events that cannot be predicted—but the situations mentioned above are not black swans because they could be predicted. The hawk and the ricochet are outliers in that they were possible, but extremely unlikely. Unfortunately, almost all retirement income models simply ignore outliers—therefore, retirees should not.

The 4 percent inflation-adjusted portfolio withdrawal rate assumed a 50/50 mix of stocks and bonds and provided a 94 percent confidence level that it would last at least 30 years; however, it also assumes that the long term returns of stocks and bonds continues into the future. Instead, if we assume that this current low-bond yield environment hangs on for a decade before rates return to their historic “norm,” our confidence in the retirement money lasting 30 years drops to 68 percent, and if bond yields never recover, our confidence in producing that 4 percent payout rate drops to 43 percent.1

The previous example looked at an outlier of very low bond rates. Sequence of returns risk means starting withdrawals during a period of losses. This risk is not an extreme outlier, because the bear markets of the 1970s showed what could happen. Yet it wasn’t until after we had two severe bear markets within eight years of each other that Wall Street considered reducing the suggested levels of sustainable withdrawals below 4 percent.

Another outlier is if a medical breakthrough in longevity results, where living to age 100 or 105 becomes commonplace; to get retirement income confidence levels over 90 percent would require investment portfolio withdrawals to drop below 2 percent.

If any of these three outliers occur, the options are to save much, much more for retirement (impossible for one already at retirement age); to withdraw much, much less; or to die early.

Another way is to transfer the risk of these outliers to a third party—an annuity carrier.

A guaranteed lifetime income—whether it comes from an income annuity, a deferred income annuity or a lifetime withdrawal benefit—provides protection from retiring at the wrong time, living too long or earning too little. It assures that whether you sink your putt or not, you can go on with your game.

A guaranteed annuity income won’t help if the world gets destroyed by an asteroid, nor will it stop someone who chooses playing slot machines as their new retirement activity. However, when it comes to retirement income, fixed annuities lower the risk from many outliers and eliminate others. Perhaps the biggest risk with fixed annuities is that retirees won’t learn about them until it is too late.


 1. “The 4 Percent Rule is Not Safe in a Low-Yield World,” Finke, Wade and Blanchett, January 2013,

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Understanding Your Own Investment Risk Tolerance

[ 0 ] April 9, 2014

Spectrum Financial Solutions, FL, RisksMost people, once they get safely past their teenage years, have a pretty concrete list of risks they don’t care to take.

Skydiving, for instance, is either on your bucket list or not. After a certain age, you’re either itching to do it or itching to avoid it.

While we tend to get better at assessing risk as we get older, we don’t seem to learn as much about financial risk. In the markets, we seem to be perpetual teenagers, always stepping in too deep for our own good.

Unless the market moves against us once, hard. Then the opposite tends to happen. We get over-concerned about risk to the point that we stop investing completely.

Understanding where you are on this curve is important. If you take too little risk as a young investor, you might leave a lot of money on the table. Failing to realize the advantage of time means your money compounds at a lower rate or not at all. That’s very hard to overcome later in life.

The late saver then tries to do exactly that — to turn back the clock and make up for missing time. That investor then tends to take on too much risk for his or her own good, always pushing the envelope on their investments.

A few early successes is even worse. It’s easy to become convinced of your own investing acumen and to then confuse skill with blind luck. Until, of course, the luck runs out. Even then, we tend to blame the markets, or the government, or the banks, anyone but the person making the actual investments — ourselves.

How can you learn your own risk tolerance? It’s not that hard, really. Here are four basic questions any financial advisor would ask:

1.      How long until you need this money?

If you have 30 years to save and invest, it’s likely that you can handle a few market setbacks along the way. This assumption changes a lot if you are just five years away from retirement.

2.      How long do you expect to work? To live in retirement?

Many people get to retirement age unready to quit working or unable to do so, having saved too little. If work is part of your retirement plan, you might be able to take on a little more risk than most investors your age. Also, consider how long you might live in retirement. Running out of money in your later years is an avoidable outcome.

3.      How do you react when markets go up?

Joy? Champagne? Shopping sprees in celebration? Remember that you haven’t actually made any money until you sell those assets, and that might not be for decades to come. Likewise, some investors take a rising market as a sign to invest more heavily, even if stocks seem expensive.

4.      How do you react when markets go down?

Dread? Depression? Fear? Remember, you also haven’t lost any money unless you sell at a bottom. Likewise, investors tend to avoid investing as stock prices fall, which is contrary to the whole concept of “buy low and sell high.”

Correctly measuring investment risk tolerance is an important part of the any long-term retirement plan. Get it right, and you can insulate yourself from the kinds of emotional trading mistakes that plague retirement savers.

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