Managing Risk and Your Retirement Income

mt everest

Over this past weekend, I was flipping through Netflix and came across a great “oldie” about Mt Everest. The film, Everest, was from the late 1990’s, right about when eight people tragically lost their lives on the mountain. It was a groundbreaking documentary for its time, as it was the first film to be made on the mountain, back when carrying heavy camera equipment up those steep slopes seemed nearly impossible. And that film highlighted the fact that while getting to the summit can be very challenging, many of the big risks occur during the descent. Just ask any mountaineering guide. They will tell you that getting to the top is optional, getting down is mandatory!

It kind of got me thinking about a column I recently wrote about planning both pre- and post-retirement and the challenges of both. Despite a natural tendency to focus on building your assets, planning how to turn them into retirement income deserves equal attention. Just as managing downside risk is important to asset accumulation, it’s also a critical component in planning for retirement income. When I meet new folks in our office for the first time to evaluate their current investment systems, more often than not this is not the case.  You see, risk needs to be managed on both sides of retirement.  So this week with our time together, I’d like to dig into the two unique phases of retirement planning that can ensure a smooth journey on both directions.

You’ve probably heard me say this before, but I’ll say it again – smart retirement planning incorporates systems and tools designed to maximize growth and alleviate risk.  Retirement income planning has a similar hand-in-hand relationship with downside risk management. The specific tools may sometime differ, but both accumulating assets and spending them down requires forward-looking risk management and this doesn’t end because we retire.  Managing the downside risks to our income in retirement can often start long before calling it a day on our career.

Both asset accumulation and retirement spending require tailoring a plan for the specific individual or couple.  The 4% withdrawal rule is a good starting point for determining retirement income, but our lives as well as the economy we live in rarely moves in a smooth line. A solid income retirement system needs monitoring, evaluating, and adjusting.  The best plans systematically reduce risk by incorporating quantitative data to help put the system in the highest probability of financial success  helping you enjoy retirement and keep a safe cushion of assets.

So, let’s look at the four major areas that will impact your retirement income plan and the associated risks: Expenses, Investment Rate of Return, The Rate of Inflation, and Longevity. 

Expenses. Financial needs certainly change throughout retirement. We may initially spend less on things associated with our career like clothing or transportation. Some discretionary items like travel and leisure activity we will be able to adjust, for the better or worse, depending on external circumstances.   And we may still need to make larger outlays on things like a new roof or central air.  But the biggest risk most of us will face is increased health care costs, particularly later in retirement.

Investment Rate of Return. Rate of return on your investments will go a long way in dictating your withdrawal rate. Your rate of return will be impacted by a number of factors, such as your risk budget,  the volatility in the market, and your process. A lower risk budget may lessen returns during bull markets but can provide protection to your portfolio during bear markets. Incorporating downside risk mitigation may allow some level of participation in higher risk investments, while putting a floor on your downside experience. This is critical folks.  

Having a downside risk mitigation system in place can also help combat problems that come with a less favorable sequence of returns.  For example, two different individuals retiring ten years apart might both achieve the same average annual return over 30 years, but one might run out of money much sooner if they experienced due to of poor performance early in retirement. It’s one thing to look at a retirement spending plan that projects a level 8% return, it’s quite another to live in the real world of variable returns.  We may use things like the 4% withdrawal rule as a jumping off point, but your individual risk budget and different visions of retirement means there is no one size fits all solution. 

Inflation.  Former President Ronald Reagan once said, “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” It is likely your retirement might last 20 to 30 years or possibly longer.  It is also likely that the overall cost of goods and services will increase significantly over that time due to inflation. The inflation rate is a broad number and is driven by the varied sectors of economy.  For instance, the rapidly rising cost of a new homes will have little impact on someone who has paid off their home.  Yet other things like the increasing cost of prescription medications have already proven to be a growing burden to retirees. Just like the rate of return on investments, inflation won’t move in a straight line.  You may experience years of relative stability or we could experience the something similar to the late 1970’s double-digit inflation. 

Longevity. It’s pretty simple – the longer you live, the more money you will need. None of us know with any certainty how long we will live, but a family history of longevity may mean we could potentially live far into our 80s or beyond. And of course, our own health as well as the medical history in the generation that came before us will impact us as well.

The bottom line? Don’t be narrowly focused only on growing your assets with no plan for using those assets in retirement. Growing your retirement assets is important but protecting them while they fund your retirement is just as critical. So make sure you design and deploy your retirement system for that descent down the retirement mountain as well!  I might just give you that peace of mind you deserve.

And as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield. Jeff can be reached at

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