When Investment Performance Is Not Enough

Before retirement, most investors spend much of their time evaluating the performance of their investments. They compare the performance of their investments to familiar benchmarks such as the S&P 500, to other people’s investments, and to the general background of speculation by pundits in the media. And from time-to-time they, or their advisor, may change a mutual fund here, or a stock selection there. For most investors the general framework for making investment decisions is based on performance. Pre-retirement investors tend to focus on the question: how fast is my money growing?

Unfortunately, most investors do not realize that managing their money in retirement is far more complex than managing their money during their working years. Applying a simple “how fast is my money growing” framework to investment management in retirement is a recipe for disaster.

During retirement investors need to create an entirely different framework for making good investment management decisions–one in which investment performance plays a very different role than it does during their working years. Investment performance becomes one among many important factors that affect the longevity of the client’s investment portfolio.

Creating A Complete Investment Strategy

The critical question retirement investors need to ask is: what is the best strategy for withdrawing money from my nest egg? The answer to this question is not simple or clear cut. It requires a careful analysis of multiple factors. During retirement some of the factors that must be taken into account are:

• Determining a sustainable yearly rate of withdrawal (such as 5%).
• Periodically adjusting the yearly withdrawal rate based on the short-term performance of the market and the effects of inflation on fixed expenses.
• Establishing the “depth” of a cash account that may contain several years’ worth of living expenses.
• Determining a plan for rebalancing.
• Co-coordinating withdrawals from all accounts (taxable and tax-deferred).
• Clearly delineating the difference between those expenses that are necessary and those that are optional.
• Understanding the difference between the effects of short-term fluctuations in the market and the impact of a protracted Bear Market.

During retirement investors need to have a financial plan that addresses all of these factors. Otherwise they are courting disaster.

No Simple Solutions

The design of investment portfolios during retirement is one of the most important areas of contemporary investment research. San Diego’s own Bill Bengen has been one of the pioneers in this field. His research led to the conclusion that withdrawal rates above 5% (adjusted for inflation each year) are usually not sustainable. However, despite the evolving body or research there is not yet a “science” of money management during retirement. The issues involved are complex and there are a variety of approaches that fit within the best practices in the field.

There is no simple formula that fits every investor. Investment management during retirement requires sophisticated analysis and client-specific planning. To be blunt: creating a workable retirement strategy for your investments cannot be adequately handled through simplistic retirement calculators or by purchasing a particular investment product such as an annuity. Investors need expert help.

Finding The Right Advisor

Unfortunately there is no credential or title that identifies investment advisors or financial planners who excel in the area of investment planning during retirement. None-the-less, there are some important features that investors can look for in a genuine retirement-oriented investment plan:

• Does the advisor have a methodology for stress testing the investment portfolio to see how long it will survive in both good and bad markets?
• Does the advisor help clients determine the withdrawal strategy that best suits the client’s lifestyle expectations about retirement? There is no one-size-fits-all answer to this question.
• Is the advisor dedicated to helping the client monitor their spending?
• Does the advisor help co-ordinate withdrawals from all accounts?

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 management will spend at least as much time discussing these factors as they will spend talking about specific investments or investment strategies. For investors heading toward retirement it is imperative that they begin to consider the question of how to get money out of their nest egg safely.