Retirement Challenge

THE CHALLENGE

For the first time in history, retirees are more concerned with living too long than they are about a premature passing.

Longevity is the new retirement risk.
A married couple at age 65 has a nearly 40% probability of at least one of them living to age 95 or beyond.*  We are all living longer.  We could live well beyond the monetary benefits of our retirement plans.
(*Mouton & Company, Inc.)

A problem made worse when you consider the following:

Between January 1, 1988 and December 31, 2007, the Standard & Poors index
experienced an average growth rate of 11.81%, yet the average diversified mutual
fund investor earned only 3.45%.
(Dalbar & Assoc QAIB 2008)

WHY?

Risk.
Most continue to invest as they had during their working years, taking on far too much risk.  Investing for growth, rather than for income.  Hoping any achieved appreciation will be sufficient enough to offset their annual income withdrawal needs.  Empirical evidence confirms this to be “unsustainable” at best.

Going Backwards.

How many -20%, -30%, or -40% years can your portfolio sustain, while continuing to provide income during retirement?

Lack of strategy
Unfortunately, the old “buy and hold” asset allocation model has been proven no longer effective at minimizing risk.  Only an active or “tactical” strategy enabling you to go “risk off” during bad times – similar to that used by large pensions, charities, and foundations – will truly offer effective downside protection. By utilizing some of the best LOW RISK, LOW VOLATILITY private wealth managers in the country, we’re able to position you defensively during negative markets, and opportunistically during rising markets.

Emotions
Many investors succumbed to emotionally-based decision making driven first by greed, and then by fear.
Lastly…

The Average Return Myth.

While accumulating assets during our lifetime, AVERAGE returns are used as the measure to determine the relative progression of our portfolios.  However, once we approach retirement, or more importantly, begin taking distributions from our IRAs during retirement, a different approach is required.

Most financial plans focus on AVERAGE returns, instead of ANNUALIZED returns.  This is critically flawed.

Doing so as you approach retirement, or begin taking income during retirement, could detrimentally affect your portfolio – causing it to be depleted significantly sooner than you anticipated.  Consider the difference between the AVERAGE and ANNUALIZED returns as reported for a widely held portfolio holding:

Initial Investment: $100,000.

Year Annual Returns Market Value
1997 74% $174,000
1998 176% $480,240
1999 37% $657,292
2000 – 81% $125,006
2001 – 53% $58,753
2002 – 75% $14,688
2003 125% $33,048

203%  Divided by 7 years  = 29% AVERAGE     vs    ANNUALIZED return of  – 15%

Clearly, ANNUALIZED returns are more reflective of the true year over year performance. That said, the above illustrates that had you been withdrawing income from the market value based on AVERAGE returns, you would have run out of money.  Unfortunately, most advisors fail to recognize the following critical point:

“Investment and tax strategies used to effectively protect and distribute wealth, are inherently different than those used to accumulate wealth.”

Proof of this was seen in the many retirement portfolios that failed after only one year of a declining market in 2008.

Should you wish to learn more about the unique success our clients have experienced – during a time when others have not – please call us directly at (413) 243-2654, ext. 125.

Why your IRA is likely at risk....and how to correct it

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