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What Matters in Retirement
When investors get to retirement age, there are certain things that are going to be quite different. The first, and best, thing is obviously not having to go to work every day. When it comes to your finances, how you choose to invest and what you should be focusing on might be a little different than most of the advice you have received over your working career. For many, the monies saved over a working career now will change directions and be coming OUT of your retirement accounts. That 180 degree change in direction will necessitate some fundamental changes in your investment strategy.
When you go to take monies out of your account, unless it is in cash, you will have to liquidate a portion of your investments to generate cash to withdrawal. Simple enough. Now, even a diversified, balanced portfolio does not move in a straight-line over time. As a matter of fact, almost 90% of asset classes were negative in 2018. So, at least for a portion of 2018 if you were selling investments to take withdrawals, you were selling some investments at a loss. Selling investments occasionally at a loss isn’t the worst thing in the world, but you need to understand that you need an even higher rate of return from you remaining investments to re-coup said loss. So, the first big concept you will have to wrap your head around in retirement, is to pay attention where your money comes from. Selling frequently at large losses in a bear market may significantly impact the longevity of your assets. You should have a plan for which investments you may liquidate and when depending on various market conditions.
Another hall-mark of long-term investing over one’s career has been volatility, while painful is good for you. That is fundamentally true, if you are consistently buying (contributing to) that investment over long-periods of time. However, as we mentioned above a highly volatile portfolio is more prone to you selling at losses, possibly significant and sustained losses. While diversification on its own has proven to reduce portfolio risk, attempts may be made to also reduce your overall portfolio volatility. Without trying to time the market, there are times in which it may make sense to re-balance your portfolio or even gradually reduce or increase risk allocations. Some of our own in-house research modeling has shown that portfolios that have a lower standard deviation (volatility) have a higher success rates (see graphic below).
Using Monte-Carlo analysis on various rates of return, and a 4% withdrawal rate we can see that portfolios with lower standard deviations have a higher “survival rate” over 25-year periods. Survival rate would indicate having a balance greater than zero over a 25-year period.
So, to summarize, investing in retirement is different and requires looking through a different lens. Fundamentally, volatility will have a much different effect on your portfolio and will potentially require a more active role in management. You should have a strategy to employ to help you determine the source of your withdrawals in times of market turbulence and address your individual investment selection in an attempt to reduce overall portfolio volatility.
The views are those of Robert Jeter and should not be construed as specific investment advice. Investors cannot directly invest in indices. Past performance is not a guarantee of future results.
Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.