Consider these hard truths: unlucky timing can be very bad for your financial health; bad assumptions lead to bad outcomes; mistakes become far more costly later in life.
Let’s look at a case study to see if the timing of retirement is important and whether the risk can be mitigated.
The chart below shows two retirees who experience the same annual market results over a 10-year period, but in reverse order. They each have an average 6% annual return. They each take out 6% annually from their investments to live on. Steady Eddie hits the ball down the middle and gets a little lucky along the way. His million dollar investment experiences some luck as well. He has good market performance in the beginning of retirement, but Fran Yips experiences bad markets at the start of retirement. After 10 years, Steady Eddie has almost all his principal left, but Fran Yips is down to barely a third of her principal. And they could very well have fifteen years left of retirement! What should each of them have done along the way? Would they have made the right choices without good advice? Why leave your livelihood up to chance?
| IMPACT OF UNFORTUNATE TIMING ON RETIREMENT PLANS | ||||
| Steady Eddie | Fran Yips | |||
| $1,000,000 | $1,000,000 | |||
| Year 1 | 1,168,000 | 24% | -18% | 748,000 |
| Year 2 | 1,294,000 | 17% | -12% | 586,240 |
| Year 3 | 1,326,125 | 8% | 10% | 572,864 |
| Year 4 | 1,466,305 | 16% | 5% | 529,507 |
| Year 5 | 1,658,240 | 18% | -8% | 415,147 |
| Year 6 | 1,453,580 | -8% | 18% | 417,873 |
| Year 7 | 1,454,259 | 5% | 16% | 412,733 |
| Year 8 | 1,527,685 | 10% | 8% | 373,751 |
| Year 9 | 1,272,365 | -12% | 17% | 365,289 |
| Year 10 | 975,338 | -18% | 24% | 380,958 |
| Average Return | 6% | 6% | ||
How many retirees really understand the impact of market drops when they are living on savings? Replacing income with investment income is the main focus, when the actual date we plan to retire is within a decade. It’s not enough to keep investing in these massive funds. It’s not wise to put all of your savings in insurance products that guarantee income, because you pay for it. It costs extra for survivor benefits and your heirs don’t inherit anything when the primary accounts holders have passed away. Please don’t misunderstand my tone, I have insurance and think highly of making sure I have it as part of my financial planning, but there is a reason why the tallest buildings in any U.S. city are occupied by insurance companies. It costs money for guarantees. Our view is that we can come close to guaranteed paychecks by doing the work and research in-house.
Circling back to the title, is there a concern of timing with respect to the day you retire? We believe passive investing and outsourcing your investing decisions to mutual funds, index funds, and ETF’s simply because they are less expensive puts you at risk. However, this misses the point. CASH FLOW! Most of these overly-diversified products should be avoided as you get within a decade of retirement because performance is always subject to unforeseen risks. A better way to go is investing direct with high quality companies and bond issuers. Specifically, investing in high quality companies with a culture of dividend payment and dividend growth will result in above-average returns over time. More importantly the cash flow that you’ll be earning, in order to pay the bills, becomes very predictable. Many of our readers already know that bonds serve a purpose but typically break even or lose money to that evil entity called inflation. This is especially the case now, with the 10-year treasury paying a mere 1.85%.
Dividends are the engine of investment returns. Dividends provide intelligence concerning a company’s financial strength, the quality of its earnings and the confidence of its management and board of directors. They furnish investors with a steady and growing stream of income that dampens share price volatility and contributes meaningfully to long term returns. Get this stream of cash flow in place well before you decide to retire and it won’t matter if the market is up, down, or sideways.
Many investors need a professional to help them select these securities in order to meet their current and future needs. Call us to learn more about how we work with clients like you who want to accelerate investment returns without undue risk.
Blake Parrish
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: [email protected]
Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”