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WHEN INVESTMENT
PERFORMANCE IS NOT ENOUGH
Before
retirement, most investors spend much of their time comparing the performance of their investments to familiar
benchmarks such as the S&P 500 or to the general background of market speculation in the media. And from time-to-time
the investor, or their advisor, may change a mutual fund here, or a stock selection there based on the relative performance
of their investments. Unfortunately, a simple "how fast is my money growing" framework to investing in retirement is likely to be a recipe for disaster.
The critical question retirement investors need to ask is: what
is the best strategy for withdrawing money from my nest egg?
During retirement controlling volatility becomes the key to providing a predictable, sustainable level of income
throughout retirement.
Building
a safe, long-term investment strategy for retirement requires the following elements:
- Determining a sustainable beginning rate of withdrawal (such as 5%).
- Adjusting the yearly withdrawal rate based on the market
environment and the effects of inflation on fixed expenses.
- Establishing a cash account that may contain up to five
years worth of living expenses.
- Co-coordinating withdrawals from all accounts (taxable and tax-deferred).
- Determining a plan for rebalancing.
- Tracking the cumulative overall performance of the portfolio
and the year-by-year spending of the client.
Good retirement
planning lays out a framework for investment management based on the factors above. Advisors who are truly knowledgeable
about the field of retirement-oriented investment planning will spend at least as much time discussing these factors
as they will spend talking about specific investments.
In order to
get money out of your nest egg safely you must keep track of the big picture: expenses, investments and income.
Because in retirement investment performance is not enough to guarantee that you will not run out of money.
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