Retirement Distribution
Challenges:
Live on Less, Help Make It Last
BY
HOLLY CARROCCIO, CFP®
NEXUS ADVISORS, L.L.C.
972-348-6311
[email protected]
Securities, investment advisory and financial planning services offered through qualified registered representatives of
MML Investors Services, LLC., Member SIPC.
Supervisory Office: 10000 North Central Expressway, Suite 1200, Dallas, Texas 75231-2363 (972) 348-6300.
Nexus Advisors LLC is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies.
Challenge #1:
Living too
Long
 63% chance that one spouse of a
couple who are both age 65 will live to
age 90
 Close to 40% chance of one spouse
living to age 95
 Difficult to budget and invest when
planning for a 25 to 30 year
retirement horizon
Source: Annuity 2000 Mortality Table, Society of Actuaries
Solution #1:
Develop a
Spending Rule
 Develop a rate of withdrawal from
savings that is sustainable over
long time periods
Rate of
100%
Withdrawal Bonds
75%
Bonds
/25%
Stocks
50%
Bonds
/50%
Stocks
25%
Bonds
/75%
Stocks
100%
Stocks
4%
87%
98%
96%
93%
90%
5%
38%
75%
82%
81%
79%
6%
5%
31%
56%
64%
65%
7%
0%
6%
30%
45%
51%
8%
0%
0%
13%
29%
39%
Source: Morningstar, Inc. 3/1/2011
Challenge #2:
Should I move
to bonds or
cash?
 “Next time the market starts down,
I’m going to get out and move to
bonds and cash.”
 Most people feel they can abandon
their allocation temporarily during
market downturns
 Average equity returns from 1991 to
2010: 9.14%
 Average equity investor returns
during same period: 3.83%
Source: Debar Study 12/31/2010
Challenge #2:
Should I move
to bonds or
cash?
 Recency bias: What just happened
will keep happening
 Action bias: Desire to take action
under stress
 Some downturns are short term
corrections, not economic reversals,
how do you tell the difference?



3% Pullback every 90 Days
90% of these will be between 3 – 10%
Steepest = 15.99%
Source: Morningstar
Solution #2:
Don’t Discount
History &
Diversification
 Over 58 years since 1951, the S & P 500
delivered negative returns 14 of those years.
 50/50 portfolio lost 11 of 58 years
 2008: A perfect storm, S&P* down 37%,
worst since 1951
 50/50 portfolio, down 16.9% in 2008, only
time since 1951 down more than 10% loss
 In every 12 month period following a
There is no guarantee that a
diversified portfolio will
outperform a non-diversified
portfolio or that diversification
among asset classes will
reduce risk.
“bottom”, the market soars
 70% of the returns are earned in 50% of the
time
Sources: Morningstar
*Indices are not available for direct investment.
S & P Rallies after recessions:
1951 to 2003
Recession
Period
Market
Bottom
Gain in First
12 Months
July 1953 – May
1954
August 1953
35.0%
Apr 1960 – Feb
1961
Oct 1960
32.6%
Dec 1969 – Nov
1970
Jun 1970
41.9%
Nov. 1973 – Mar
1975
Dec 1974
37.2%
Jul 1981 – Nov
1982
Jul 1982
59.4%
Jul 1990 – Mar
1991
Oct 1990
33.5%
Mar 2001 – Nov
2001
Feb 2003
38.5%
 Why not just invest in all bonds to start
with?
Challenge #3:
Inflation
 Assume the unrealistic assumption that
inflation will remain 3.16% as it has for 30
years, through 12/31/2010.
 Costs of living are 40% higher in 10 years,
and have more than doubled in 20 years.
 If using all bonds to manage risk, no
increases to income
 If average returns on bonds and CDs are
5%, for example, you would have to adjust
the withdrawal rate down from 4% to 1.84%
Source: Bureau of Labor Statistics, September 2011
Solution #3:
Inflation
Busters
 Stocks returns have on average
outpaced fixed income
investments over long periods of
time.
 Keep 25% to 50% of the portfolio
in “growth” mode
Investing in specific sectors may experience greater short-term
price volatility than a more diversified. They are more suitable for
use in an aggressive component of an investment program.
Challenge #4:
“I spend more
than a 4%
withdrawal
will cover”
 Most people spend more than
they make, retirees are no
exception
 We like to avoid knowing where
our money goes
Solution #4:
Consider
various
spending
strategies
 Consider multiple portfolio buckets
 Toggle income: During downturns, spend
money from bonds not stocks


Rebalances portfolio back toward stocks
Avoid locking in stock losses
 Carefully review spending: Need vs.
discretionary
 Spending could be phased:
 Woo Hoo! Early retirement: The 1 – 2 years after
 Normalizing: 8-15 years: travel, hobbies, etc.
 Late retirement: Medical, aging issues
 Use alternative sources of income: Real
Estate, fixed annuities
Solution #5: Tax diversification
Challenge #5:
Taxes are
likely to go up
Municipals
Roth (conversions)
Life Insurance Cash Values
Non-qualified investments
Annuitization (non-qualified)
Distributions under the policy (including cash dividends and partial/full
surrenders) are not subject to taxation up to the amount paid in the policy
(cost basis). If the policy is a Modified Endowment Contract, policy loans
&/or distributions are taxable to the extent of gain and are subject to a 10%
tax penalty. Access to cash values through borrowing or partial surrenders
will reduce the policy’s cash value and death benefit, increase the chance the
policy terminates before the death of the insured.
The information provided is not written or
intended as tax or legal advice and may not be
relied on for purposes of avoiding any federal
tax penalties. Nexus Advisors, LLC, its
employees or representatives are not
authorized to give legal or tax advice.
Individuals are encouraged to seek advice
from their own tax or legal counsel.