What’s Past Is Prologue: Making Income Last In Retirement

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My family had limited financial resources when I was young. That was out of my control, but I learned at an early age that I could control my work ethic. That’s why I have always been a worker. I don’t ever remember not working hard.

I began with a paper route at age 10, flipped burgers and washed dishes at the Raynham Dog Track during high school, started a landscape business at age 14, and waited on tables during college before going to sea at 21.

I remember riding my bike in those earliest days, slipping and sliding through the snow down South Main Street in Raynham to deliver the Taunton Gazette.  One cold February day, wet and freezing, barely able to feel my fingers, I dreamt about retiring a millionaire someday. To me, a “millionaire” was someone who didn’t have to work for a living anymore. A millionaire was someone who’d really made it.

These days, well, being a millionaire may not even mean you’re going to be able to relax in retirement.

While on vacation last week, I came across a recent article showing how long a million bucks will last in retirement in each state. It ranked Massachusetts 46th out of 50.[1]

According to the report, $1 million in retirement savings will last the average couple residing in Massachusetts 17 years and four months until it runs out.

Here’s the problem: The average length of retirement is 18 years (and rising). That means a lot of us could live longer than our savings will last.

I thought about the article and how it relates to the two stages of our financial lifecycle: There’s our pre-retirement, or accumulation years, and then there’s our retirement, or distribution years.

In our accumulation years most of us earn employment income, so we do not rely on income from our investments.  As a result, many of us implement investment systems that are not vital to our income plan.  Once we pivot to our distribution years, we need as much control as possible over our investment system because it becomes critical to our income plan. Maintaining that control is essential to determining how long our retirement assets will last.

Folks, with the markets reaching all-time highs, wouldn’t now be a good time to understand questions to ask, to gain as much control as possible over the longevity of your financial assets?

You betcha!

Boston-based DALBAR produces a widely respected annual study of investors that’s now in its second decade of publication. It can help us understand the behavior of the average investor. DALBAR claims that the average investor fails because they make financial decisions based on emotion rather than strategy. It helps us understand why using facts, logic and a process for managing those decisions, rather than “gut instinct,” must be the foundation of any financial system.

Think of it this way. The S&P 500 collapsed by about 50% after cresting in 2000. If you had a million bucks it would have been worth about $500,000 by 2003. That’s a huge setback, but if you were still in your accumulation years, working a little harder and saving more could help you get back on track to reach your retirement goals.

For many, the philosophy was, “The markets always come back.” And for the most part, that philosophy proved true. By 2007 many investors were back at $1 million, only to see it denigrate again by March of 2009. For those patient enough, it came back again. If you were in your accumulation years it certainly hurt, but about six years later you were back at a million bucks.

But what if you are in your distribution years during such a market downturns? Let’s assume you pull out 4% of your portfolio to produce about $40,000 of annual income, and because of market volatility, your million is halved. Your 4% withdrawal now turns into an 8% withdrawal. Your retirement savings, which you depend on to provide you income, will be gone twice as fast.

Hmm…You either cut your income or run out of money sooner.

That leaves many of us with an important question to answer: How do we take control to help make our retirement savings last longer?

As the “Great Bard” William Shakespeare once wrote, “What’s past is prologue.” You see, while we may not have control over the future of the markets, we can learn about them by looking at how they behaved in the past. The first step to gain more control is to understand how your investment system will behave through a full market cycle. A market cycle usually lasts 5-8 years.

Ask questions such as: How would my investment system behave during a year such as 2008? Or, how much swing does my strategy have over time? Quantify it; put it into dollars.  Ask yourself if you are comfortable with that swing.  And just how would that impact your income?

These questions are critical to help anticipate investment behavior before the swing occurs.

The next step is to explore and deploy a financial system where both the investment and income strategies work harmoniously and cohesively. An investment strategy that emphasizes managing losses rather than focusing purely on gains can give you an important leg up on the next downturn, so you’re not left struggling to make ends meet, or left scrambling to work even longer to get back what you’ve lost.

Heck, if all else fails, we could all move to Mississippi since the report ranked it as the least expensive state for retirees.

Nope, not for me.

Take control.

Be vigilant and stay alert, because you deserve more.

Have a great week!


Jeff Cutter, CPA, PFS is President at Cutter Financial Group, LLC, with offices is Falmouth, Plymouth, and Mansfield. Cutter Financial Group provides private wealth and investment management advice incorporating low risk, low volatility financial strategies. Jeff can be reached at jeff@www.cutter-copy.dev.

Cutter Financial Group LLC (“Cutter Financial”) is a registered investment advisor.

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[1] http://tinyurl.com/y8n3ebnl