Running On Empty

Attention: Retired Investors

Subject: Retirement income considerations

We will not be discussing pension income in this blog piece – specific income and investment strategies should be discussed with your financial planner as they can be as unique as your individual circumstances.

Last month we discussed biases or behavioral tendencies that keep investors from enjoying an excellent investment experience. A popular bias is recency effect. It’s a simple concept yet powerful and it can cost you plenty. Recency: “You recall recent events more clearly than events happening longer ago.” Well of course you do, but how is that dangerous? You expect the events (or in the case of financial markets, performance) of the recent past to continue into the future. The recent performance of the U.S. market, particularly the S&P 500 index which tracks the largest U.S. companies, has performed exceptionally well over the past few years. Unfortunately, future returns from markets are unknowable. From 2013 – 2017, the average annual return of the S&P was 15.8%, well above its long term historical average of 10.2% (since 1926)1. So investors start to consider if they should have all of their money invested in the S&P. So where is the danger? If this were 2010, we’d be writing that the S&P 500 just concluded a 10 year period that resulted in a -0.9% average annual loss – put another way, you lost 10% of your wealth over a 10 year period!

A more statistically robust method for looking at returns is by using 10 year rolling periods. For example, January 1970 – December 1979; February 1970 - January 1980, March 1970 – February 1980, etc. Here we have more time periods which gives us a greater confidence in the findings. Gregg Fisher at Gerstein Fisher found the following: Adding international stocks to a U.S. stock portfolio (65%/35%) improved the investment experience compared to just the S&P 500 (higher return, lower risk; some equate volatility or standard deviation with risk). We do not have reliable emerging markets returns data before 1988. The lesson here is that diversification benefits the patient investor.

2 RealAssets Adviser- November 2018 Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio

The S&P 500 index is a great investment…within a broadly diversified portfolio, not on its own. If capitalism “works” (certainly not perfectly), which means it provides investors with a positive return on their money over time, then it works in all free markets around the world, not just here. And while they can exhibit high correlation to each other at times (move in the same direction), there are often periods when they move independently of each other (low correlation). This is why diversification helps over the long term.

What else should retirees (or those closing in on retirement) consider to extend their account distributions? Common sense gives us the answers. We are often surprised why otherwise smart folks abandon their common sense when it comes to investing.

  1. If you’re still working, consider putting off retirement for another year or two.
  2. Consider to continue working at something for less money but greater enjoyment full or part time after your career ends.
  3. Consider relocating to a less expensive home or area of the country.
  4. A recent movement has seen retirees renting in retirement rather than owning.
  5. While we are not fans of most annuities, creating a guaranteed lifetime income stream with a portion of your money in a low cost fixed annuity is an option to attain peace of mind.
  6. A reverse mortgage with proper unbiased advice (NOT from the provider of the product) can help some investors increase their retirement income.

Here are two approaches worthy of your consideration:

  • The 4% model – assume a 4% withdrawal rate from your investments. Will this amount sustain you in retirement when added to any other income you might have? This approach maintains your wealth. Most investors will eat into their principal over time and while not a reason to panic, planning is vital so as to not outlive your money.
  • The Stanford Model – divide your money into three buckets;
    • a. Guaranteed income to cover your cost of living like mortgage/rent, food, healthcare, etc. (Pensions, annuities).
    • b. “Bonus money” to cover discretionary spending like vacations, dinner out, gifts, etc. (P/T work, investment income).
    • c. Emergency fund – money set aside in very safe accounts like a money market or bank savings account for unforeseen emergencies like a roof on the house, loans to children, etc.

Creating a sustainable stream of income to last a lifetime is no simple task but common sense is essential. If something sounds too good to be true, it is. In depth financial planning with an objective professional who acts in a fiduciary capacity is a great place to start. Keep costs and taxes to a minimum, and diversify away as much risk as possible so the unforeseen catastrophic event (the “black swan”) has minimal impact on your money. Then do some “lifestyle planning” to live within your means. Lastly, make sure you do serious planning on healthcare, for many the largest late-in-life expense. More on this aspect of planning next month, especially for single women head of households.


Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts may differ materially from the index portfolios. As with any investment strategy, there is a potential for profit as well as the possibility of loss.

Standard & Poor’s 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market