Is successful retirement possible in this market?

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By Linda Norman

The whimsical poet Richard Armour once wrote: that money talks I’ll not deny, I heard it once it said “Goodbye.”

Plunging markets over the past several months have been unpleasant for all investors, and may have derailed your retirement portfolio. Yet, this is not a time to give up, nor is it a time for inaction. The rules of a carefree retirement may have changed and will take some careful planning going forward.

You can use this opportunity when the markets are down to reassess and reaffirm your retirement goals. Are your asset allocation and diversification choices delivering as expected? A portfolio that experiences a significant drop in the first two years of retirement has a far greater chance of depletion sooner than anticipated. This risk is known as the variability of returns and is not one that is often addressed adequately. The following example will explain why this is important.

A gentleman came into my office a few weeks ago with a projection from his current financial advisor utilizing an 8% assumed rate of return. Overall, 8% is not an outrageous assumed rate of return on a portfolio that was 75 percent equities (stocks) and 25 percent bonds. According to the projections he was given 8 years ago when he began his retirement he should have had more than three times the amount of money that he actually had left. His question to me was should he go back to work? Sadly, I had to tell him yes.

What had happened? Simply this: his portfolio had been decimated by two major bear markets early in his retirement. The assumptions that he had been shown did not account for any variability in his returns- think of a CD paying 8%. The financial markets don’t work like that even in an “average” scenario.

Had the same scenario happened much later he may have been able to withstand the losses.  Also, had he known to plan for fluctuations he may have been able to protect himself better. Unfortunately, he was a victim of bad advice.

No one can eliminate risk altogether, but there are positive steps that you can take to help mitigate risk. You can:

Reaffirm your risk tolerance, time horizon and overall financial goals.

Examine your asset allocation to affirm proper diversification and investment choices.

Evaluate short-term requirements and adjust for any unmet needs.

Utilize a disciplined process to continually monitor your finances and ensure informed decision making, even in poor markets.

In addition to these steps I have been reallocating my clients to portfolios that are divided along a timeline of needs. For example; any expenditures that are likely within the next 3 years are kept in liquid cash equivalents such as cash, CD’s and money market funds. Then I address the next 3-5 years with appropriate investments. The further out the timeline we go more risk can be taken if appropriate because we know that those assets won’t be needed for some time. This approach eliminates panic selling at the wrong time.

It may be tempting to go to 100% fixed income investments and while that may be an appropriate strategy for some; for most it will not provide the growth that most retiree’s will need to beat inflation. Stocks have outpaced inflation handily over the last 80 years, yet I would not recommend a portfolio of 100% stocks. Finding the right mixture of assets and ongoing monitoring is essential for a successful outcome. Maintaining a sustainable withdrawal rate is also essential. The suggested rate is in the 4-5% per annum range, although higher rates are possible if you are an older retiree.

Volatile times call for creative solutions. We must respond to current market conditions and not waste time wishing for something to come back that might not. If this market has taught us anything it is that complacency is a luxury none of us can afford.

Any opinions expressed are solely my own and not necessarily that of Raymond James Financial Services Inc.

Linda Norman is a Certified Financial Planner affiliated with Raymond James Financial Services Inc, member FINRA/SIPC. Formerly located on the 200 Corridor, her office has moved to Deerwood II office complex in Ocala. She can be reached at 629-9138, e-mail Linda.Norman@raymondjames.com or www.raymondjames.com/practicalplanner.