Separating from the workforce and living off your accumulated savings requires an organized and dedicated strategy. The new life of distributing your assets generates natural emotional responses. You have diligently saved and accumulated savings for the last 30-40 years, and now the mere thought of withdrawing those funds can create hot sweats. This emotional anxiety is amplified during declines in the account values due to equity and bond market determination.
As my friends would say, “Pause, breathe, center, and enter.” You must remain focused on the task at hand, not what would or could have occurred had the equity markets only gone higher than your distribution rate year in and year out. You are not the first retiree or near retiree to be concerned over long-term survival due to short-term chaos.
Market movements are reasonably rational over time. The earnings that companies generate fuel either dividends, capital appreciation, or a combination of the two. Your distribution strategy dictates you use a portion of those funds to replace the income you surrendered in exchange for a life of retirement. The key is recognizing the shift in priority from the accumulation of assets to income production. You can have a cool $1 million investment account, or you can have the income necessary to replace the standard of living previously funded by going to work. You do not get both, and herein lies the rub: in the last 10-12 years, recent retirees have had both, and the new reality is shockingly painful. The recent bull market lasting from the Great Recession through the Pandemic has created a false sense of expectation for retirement novices.
“Your typical average investment return during the time you were adding to your retirement accounts will likely be higher than the appropriate percentage you should withdraw at distribution,” according to Aaron Rheaume, Director of Financial Planning for the Financial Enhancement Group. “Using an average return to examine your investment performance over years where your existing account balance is significantly higher than your annual deposit amount is customary and acceptable. However, using that average return amount as annual distribution percentage is a recipe for financial ruin,” says Rheaume.
Utilizing average returns over long stretches of time are appropriate, provided your account remains relatively consistent from the beginning point, through the middle, and remains invested at the final accounting. Rarely do professionals have the discipline to hang around tumultuous periods of market volatility, let alone retirees attempting to manage distribution on their own. The emotional discourse generated by market losses or unexpected gains tends to drive even the most disciplined savers off their game.
The markets, short-term, are driven by the emotions of the participants. Today’s buyers and sellers search for a fair value to exchange their ownership of an asset, be it stock, bond, gold, bitcoin or real estate. Fear of prices falling or the emotion of greed with markets returning untold wealth are the two emotional states most responsible for wrecking retirements. Put a seat belt on your emotions and work with a professional when appropriate.
The Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.