Speeding Down the Stretch

Imagine taking a long road trip. Some 600 miles through America’s heartland to the ski slopes out west. You get everything loaded up and head off on your adventure.

You’re eager to get there so you try to speed up the journey by pressing the gas a little harder. An extra 10 miles per hour may get you there 90 minutes sooner. The roads are wide open at the start and visibility is perfect.

Fast forward to the end of the trip. You’re less than 30 miles out. You still want to press the gas, but it’s snowing. Visibility is not as great. The risks of an accident are much higher the faster you go.?

And, besides, at this point, the added speed is only going to shave off a few minutes.??Hardly noticeable. You need to recalibrate your strategy to reduce the chances of a catastrophic outcome.

This is precisely the same journey many investors face as they’re driving towards their financial goals. Going fast early in the journey made sense. More growth investments could deliver more return and potentially help you arrive at your goal much quicker.?

But, late in the journey, that aggressiveness can lead to wildly disparate outcomes. And, that may not be desirable as your goal comes into view.

Don’t snatch defeat from the jaws of victory, as they say!

So, you need to recalibrate your investments to your new reality. You’re not the 25-year-old with a few thousand bucks in your brokerage account and a lifetime of earnings ahead. Now, you’re a millionaire on paper with fewer opportunities left to save.

How to recalibrate:

1. Get a fresh handle on your goal:??what’s the annual price tag of your lifestyle. What add-ons would you like? Luxury vacations? Cars? Boats?
2. Tally up your income sources: What’s Social Security look like? Do you have a pension or an annuity? Add up all that income.
3. Determine what the portfolio needs to deliver: How much cash do you need from your investments to make up the difference? What percentage of your portfolio is that? 3%, 5%, 9%?
4. Figure out if those withdrawals are sustainable: If you need to take out 9% from your portfolio each year, you’ll likely need investments that will grow faster than 9% a year. That’s a pretty aggressive portfolio, likely one that will require investing nearly 100% in stocks. But, if you only need 3%, you have a wider range of potential choices for your investments.
5. Determine an acceptable range of outcomes: Evaluate your portfolio to see how much downside volatility you’d be willing to accept without adjusting your strategy.

Most investments don’t deliver their average returns each year. This is especially true for growth investments like stocks. The average on the S&P 500 may be ~10% historically, but very few years deliver returns nearing that average.

We all remember years where the markets delivered numbers both wildly higher AND lower than that. Higher returns you can live with. Obviously! And, we’ve seen those in recent years.

But, what about returns that are much lower? Let’s play out an example. Say you entered retirement in 2007 needing to draw about $80,000/year on your $2 million portfolio. That’s a 4% withdrawal rate. Very doable.

But, you’ve decided to remain aggressive in your investments—never deviating from how you managed your money in your younger days. Now, you encounter a 40% drawdown. Your portfolio sinks to $1.2 million. But, you still need to draw another $80,000 to fund the coming year. Now, you’re looking at a withdrawal rate approaching 7%.?

If you try to de-risk your investments now, you’re likely going to have to live with that higher rate well into the future. That can be a much more stressful experience than had you dialed back earlier when your account was still at its high water mark.?

Now, say you decided to adjust and were able to shave off some of the downside. Instead of falling to $1.2 million, your portfolio leveled off above $1.6 million. Your withdrawal rate of 5% would continue to give you a wide range of investment choices.

You would’ve put less stress on the portfolio, and hopefully less stress on yourself. You’re now left to simply focus on the alpine air and the après-ski.

For many people we've talked to, that’s what successful retirement planning looks like. Want to know what this recalibration specifically looks like for your portfolio, reach out.

Mike on the Money on TV

We got fresh inflation data this week, showing the rate of change is back on the rise. The Consumer Price Index reported a 3% increase in prices in the past year.?

What does that mean for your investments or plans to borrow money? We’ll have answers in this week’s segment.

Alright, time for you to respond:

What image would describe successful retirement planning for you?

This material is provided as a courtesy and for educational purposes only.? Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.?

?All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.