It is time for the next installment in our series of retirement mistakes, called “The 7 Deadly Sins of Retirement Planning.” #3 Too Focused On “Growth” Rather Than “Income”
The 7 Deadly Sins are:
- No Holistic Plan
- No Spend Down Strategy or Exit Plan
- Too Focused On “Growth” Rather Than “Income”
- No Volatility Buffer / Non-Correlated Asset Classes
- Not Risk Smart
- Mistakes with Insurance
- No Strategy for Taxes
Today I will Share My Experiences With Part 3: Too Focused on “Growth” Rather Than “Income”
This is where the typical investment adviser leads people down the wrong road, in my opinion.
They get people to focus on rates of return, or growing a big pile of money, so they can be happy about the number on their statement.
Now, they can go brag to their friends or beat their chest while proudly exclaiming to themselves that “I am worth X dollars!!”
But the simple fact of the matter is that those assets are simply numbers on a piece of paper. Remember why we accumulate those assets in the first place – to convert those assets into retirement income.
The numbers on the statement represent paper profits, and you cannot spend paper profits.
I must reiterate a statement that I made in an earlier blog: if all of your retirement income hinges on a managed money portfolio, the safe withdrawal rate is about 3%.
That means if you have saved $1 Million, you can safely withdraw $30,000 per year in retirement.
If you have followed “conventional wisdom” and saved the bulk of that in a pre-tax 401k or IRA, then that $30,000 coming to you is not even NET income. Tax still has to be paid as you withdraw it.
The 401k is a fantastic accumulation tool, but a lousy distribution tool. As mentioned in an earlier blog, you should have a plan that includes an exit strategy upon retirement.
If you genuinely want to enjoy your retirement and live stress-free, you MUST implement an income-producing strategy into your plan. 3% withdrawals from a managed money portfolio is suboptimal & just too inefficient.
The Fall
Now let us switch gears a bit. If 2008 taught us anything, it is that too many people count their chickens before they hatch. The typical investment adviser tends to compound the problem.
How?
Well, they are in competition with every other investment adviser.
How are they going to compete with and outperform the other guy down the street?
By promising a better rate of return of course.
But how do they do that?
Are they truly that much more genius than the next guy? Probably not.
So, how do they achieve “better” rates of return?
They invest the portfolio more aggressively.
Even if the client may not be comfortable, the adviser assures them that they know what they are doing, and the market is looking really good right now! “I can make you wealthy!”
So, the portfolio is positioned for growth.
Instead, the client should probably be moving a portion of his assets into preservation and positioning them for income. This leaves the client extremely vulnerable.
When the market is going up, we feel really good. We think we are geniuses.
Our adviser is too. We tend to get greedy and keep pushing the limits.
How quickly we forget the harsh 
lessons of the past!
But as we have seen in the last 20 years, the market can fall 30%+ in just a couple of months, and our retirement accounts can be hammered before we know what hit us.
Granted, for a 35-year-old who is 30 years away from retirement, this might not be too impactful.
He or she is not counting on that money for income anytime soon. But that is not who we are talking about here.
I am talking about the pre-retiree or the recent retiree. What happens if they lose money when they are in the “Retirement Red Zone?” The answer is that it can devastate their retirement.
If you are forced to draw from a declining asset, it is one of the worst things you can do in your financial life.
It serves as a double negative: not only are market forces driving down the value of your assets, but you are compounding the problem by taking withdrawals.
Effectively, you are selling your assets at a loss (because you need the income) thus you are locking in your losses.
Your portfolio cannot recover, even during the next bull market, because it is already too depleted.
This is known as the Sequence of Returns Risk, and historical data has shown us that the results are incredibly damaging. This is why the “3% Withdrawal Rule” exists.
So, if you were to ask me, “Ron, when is the time where I really don’t want to screw anything up – when I really don’t want to lose money?”
It would be the last 5 or 6 years before retirement, and the first 5-6 years of retirement. Prudential dubbed this the “Retirement Red Zone.”
So, 5-10 years before retirement, the smart thing to do is shift from accumulation mode into preservation mode, at least for a portion of your assets.
So how much would that be? This differs from case to case, depending on the specific scenario.
However, in general, we recommend earmarking enough to cover at least your first 8-10 years of retirement income, plus an inflation hedge.
If a pre-retiree or recent retiree does not do this, they are flirting with disaster.
What I Learned About Retirement While Working in the Mortgage Industry
Let me share this experience with you:
In 2011, I was working in the mortgage industry, as we were coming out of the financial crisis. Phone call after phone call, I was working with people desperately trying to refinance and take advantage of low-interest rates.
Thankfully, the government had recently come out with HARP loans, which allowed many homeowners to refinance their homes, even if they were underwater.
What I found most disturbing during this time was how the situation affected the retirement market.
- People who had planned to retire soon, but who now put those plans on hold indefinitely. Most had to work at least 5 more years to give their retirement accounts time to rebound
- People who were already retired, but who had to go back to work because their investments had lost so much value
- People who did not show enough income through social security & pension income, and thus could not refinance
- People who had no liquidity, because their investment adviser had them put ALL of their money in the equities market. (Previously they had relied on home equity as their “liquid” emergency fund, but now they were underwater)
People who had less than 10 years left on their mortgage, who refinanced back into a 15-year or even 30-year mortgage to lower their monthly payment because of cash flow issues
CONCLUSION
The experiences I had working with clients in the mortgage industry from 2011 – 2013 led to me ultimately entering the financial services industry.
Here, I could gain the education and experience to specialize in the retirement market.
If folks truly had someone on their side, looking at the whole picture, and not just greedily chasing rates of return, they could avoid all this.
Comprehensive planning, utilizing a variety of techniques and advanced training, is the way to a happy, secure retirement.
How do we address the problem of being 100% reliant on the performance of the equities market?
Do not forget to tune in for the next entry in this blog series, how to avoid Deadly Sin Part 4 – by creating a Volatility Buffer utilizing noncorrelated asset classes.
Thanks for taking the time to read! Feel free to contact me for a complimentary appointment to explore these items further.
P.S. If you haven’t checked it out yet, please stop by my mini online seminar How Retirees and Pre-Retirees Can Potentially Avoid Going Broke While Keeping Their Nest-Egg Secure! Tons of great information and bonus is it is 100% COMPLIMENTARY!
Comments are closed