​​Goals Based Investing  |  Retirement Income Planning  |  Annuities

G R E E N  P A S T U R E S  W E A L T H  M ​A N A G E M E N T

Losses during early retirement,
coupled with retirement income withdrawals to maintain your lifestyle,
can rapidly deplete your wealth - sending your portfolio value spiraling downward.

Key Determinants Of Whether A Flexible Systematic Withdrawal Approach To Retirement Income And Lifestyle Planning Will Succeed – meaning that you will not outlive your money:
(1) your retirement age,
(2) the size of your investment and retirement income portfolio,
(3) the rate-of-return on your portfolio,
(4) the rate at which you withdraw funds from your portfolio to live on during retirement,
(5) your retirement lifestyle,
(6) supplemental income (Social Security benefits, pension income, rental income, part-time work and so forth).
(7) inflation
(8) your health and healthcare costs, and
(9) your life expectancy (longevity), etc.

You need to ask yourself one simple question: Do you place greater faith in the stock market's ability to perform well over your retirement investment time horizon (and in your financial and emotional ability to stick with a flexible plan through bull and bear markets) - or do you place greater faith in principal protected income solutions and/or guaranteed lifetime income solutions that provide Peace Of Mind, so you do not outlive your money? 

Your answer to this question should, in large part, help determine how you choose to build your retirement income and lifestyle plan. 

A flexible systematic withdrawal approach, and a guaranteed lifetime income solutions approach, require inherently different mind-sets to structuring your retirement income and lifestyle plan. 

It is important to have a basic understanding of both approaches before committing to a long-term plan that you feel comfortable with - from a financial as well as emotional perspective.

Millions of retirees' portfolios were devastated by sequence-of-returns risk when they retired before or during the early stages of the 2007-2009 bear market, causing their long-term retirement income and lifestyle plans to implode. 

For example, let’s assume you invested $1,250,000 in a hypothetical 60% S&P 500 Index / 40% Bloomberg U.S. Aggregate Float Adjusted Bond Index Strategic Model when you retired at December 31, 2007. At the end of your first year of retirement on December 31, 2008, your portfolio would have lost (20.99%): 

Beginning Portfolio Balance, 12/31/2007                    $1,250,000
Deduct: (20.99%) loss during 2008                                 (262,375)
Subtotal                                                                             987,625
Deduct: 4.00% income distribution                                  (50,000)  
Ending Portfolio Balance, 12/31/2008                         $  937,625*
*For simplicity, assumes taxes are included in the distribution. 

If you assumed a 3.00% annual Cost Of Living Adjustment (COLA) to maintain your retirement lifestyle, then in year 2 your withdrawal would be $50,000 x 1.03 = $51,500. And your portfolio would have to earn $51,500 / $937,625 = 5.49% without further depleting the balance of your portfolio in year 2. 

Note: If your portfolio did not generate a 5.49% or higher return in year two, then the balance of your portfolio would have become further depleted in year two after taking a $51,500 withdrawal from your portfolio to maintain your retirement lifestyle. 

If your portfolio is negatively impacted by Sequence-Of-Returns Risk early on during your retirement years, then you may have to help offset investment and retirement income portfolio shortfalls by:
(a) Reducing your expenditures and your retirement lifestyle,
(b) Reducing your retirement income withdrawals and your retirement lifestyle, and/or
(c) Making adjustments to your portfolio to try and generate potentially higher performance results to make up for the shortfall (which will most likely be accompanied with correspondingly higher potential risk). 

(2) Emotion-Based Investing And Performance Chasing - You must be able to overcome the emotional stress of investing and avoid the temptation to detour from a well thought out long-term retirement and income plan during volatile up and down markets, which oftentimes result in performance chasing and poor buy-high / sell-low investment performance. 


(3) Cognitive Decline - The travails of cognitive decline could someday limit your ability to make complex decisions about suitable investments and retirement income strategies. 

(4) Peace Of Mind - The greatest financial risk that most retirees face is running out of money. If you are not emotionally comfortable relying strictly on a flexible systematic withdrawal approach, throughout multiple bull and bear markets during retirement, then you may be better off complementing your portfolio with principal protected income solutions and guaranteed lifetime income solutions to reduce risk, stress, and gain more Peace Of Mind.

We can help you structure a flexible systematic withdrawals approach to retirement income planning utilizing our Investment Management Models, Buffered Investments and Principal Protected Income Solutions in addition to your investments held elsewhere. 

We can also help deliver the guaranteed part of your retirement income and lifestyle plans that you cannot outlive (in addition to Social Security and pensions) with our Guaranteed Income Now and Guaranteed Income Later solutions. 

Regardless of whatever combination of withdrawal approaches you are comfortable with, our advice to you is simple - save more than you think you will need. The value of having more money during retirement, instead of less, makes a world of difference to your retirement lifestyle.
 

The greatest financial risk that most retirees face is running out of money.

When it comes to retirement income and lifestyle planning - there are countervailing benefits to taking a flexible systematic withdrawals approach - or purchasing guarantee lifetime income solutions that are not subject to stock market losses. 

You may find that the optimal solution is not 100% or 0% for one approach, but rather a combination of approaches, that enables you to (1) secure your retirement income and lifestyle needs, (2) provide the potential for long-term growth and, most importantly, (3) help solve for longevity risk so you do not outlive your money.

Summary

​The primary goal of taking flexible systematic withdrawals from the retirement nest egg that you have accumulated over the years is to invest to maximize returns (within your risk attitude) so you will be able to meet your future retirement income and lifestyle needs and not outlive your money.


If you take a flexible systematic withdrawal approach to retirement income and lifestyle planning, you invest and grow your portfolio over time until retirement, whereupon you continue to invest the funds during retirement, and make flexible systematic withdrawals from your portfolio each year over your lifetime to cover your retirement income and lifestyle needs (in addition to Social Security benefits, pension income, rental income, part-time work and so forth). 

The value of your portfolio will fluctuate (be "flexible") every year due to fluctuations in the stock market, bond market and fixed income rates. 

Your portfolio will go up or down depending upon if the withdrawal amount that you distribute from your portfolio is greater than or less than the return on your portfolio. 

Example 1: Retiring before an up market
Let's assume that your portfolio grows to $1,250,000 during the asset accumulation growth phase leading up to your retirement. Then, let's further assume that you determine you will need to withdraw four percent (4.00% x $1,250,000 = $50,000) from your initial retirement nest egg to meet your retirement income and lifestyle needs in year one (in addition to Social Security benefits, pension income, rental income, part-time work and so forth), adjusted for 3.00% inflation thereafter. 

If your portfolio generates a return higher than four percent (4.00%) in year one of retirement, then your portfolio entering year two of retirement will be greater than your initial $1,250,000 retirement nest egg when you retired. 

For example, let’s assume you were invested in a hypothetical 60% S&P 500 Index / 40% Bloomberg U.S. Aggregate Float Adjusted Bond Index Strategic Model when you retired at December 31, 2020. At the end of your first year of retirement on December 31, 2021, your portfolio would have earned 15.50%: 

Beginning Portfolio Balance, 12/31/2020                    $1,250,000
Add: 15.50% return on investment during 2021               193,750
Subtotal                                                                          1,443,750
Deduct: 4.00% income distribution                                   (50,000)  
Ending Portfolio Balance, 12/31/2021                        $1,393,750*
*For simplicity, assumes taxes are included in the distribution. 

If you assumed a 3.00% annual Cost Of Living Adjustment (COLA) to maintain your retirement lifestyle, then in year 2 your withdrawal would be $50,000 x 1.03 = $51,500. And your portfolio would have to earn $51,500 / $1,393,750 = 3.70% without depleting the balance of your portfolio in year 2. 

Note: An annual Cost Of Living Adjustment (COLA) will need to be made each year to help offset inflation and maintain your retirement lifestyle. For example, it took $52,350 in 2022 to have the same purchasing power as $50,000 in 2021. Click on the following link to learn more about the impact of inflation based upon annual changes in the CPI (Consumer Price Index) https://www.calculator.net/inflation-calculator.html. 

Example 2: Retiring before a down market
Once again, let's assume that your portfolio grows to $1,250,000 during the asset accumulation growth phase leading up to your retirement. Then, let's further assume that you determine you will need to withdraw four percent (4.00% x $1,250,000 = $50,000) from your initial retirement nest egg to meet your retirement income and lifestyle needs in year one (in addition to Social Security benefits, pension income, rental income, part-time work and so forth), adjusted for 3.00% inflation thereafter. 

If your portfolio generates a return lower than four percent (4.00%) in year one of retirement, then your portfolio entering year two of retirement will be less than your initial $1,250,000 retirement nest egg when you retired. 

For example, let’s assume you were invested in a hypothetical 60% S&P 500 Index / 40% Bloomberg U.S. Aggregate Float Adjusted Bond Index Strategic Model when you retired at December 31, 2021. At the end of your first year of retirement on December 31, 2022, your portfolio would have lost (16.89%): 

Beginning Portfolio Balance, 12/31/2021                    $1,250,000
Deduct: (16.89%) loss during 2022                                 (211,125)
Subtotal                                                                          1,038,875
Deduct: 4.00% income distribution                                  (50,000)  
Ending Portfolio Balance, 12/31/2022                        $  988,875*
*For simplicity, assumes taxes are included in the distribution. 

If you assumed a 3.00% annual Cost Of Living Adjustment (COLA) to maintain your retirement lifestyle, then in year 2 your withdrawal would be $50,000 x 1.03 = $51,500. And your portfolio would have to earn $51,500 / $988,875 = 5.21% without further depleting the balance of your portfolio in year 2. 

Note: An annual Cost Of Living Adjustment (COLA) will need to be made each year to help offset inflation and maintain your retirement lifestyle. For example, it will take $54,000 in 2023 to have the same purchasing power as $50,000 in 2022. Click on the following link to learn more about the impact of inflation based upon annual changes in the CPI (Consumer Price Index) https://www.calculator.net/inflation-calculator.html.

A Flexible Systematic Withdrawal Approach To Retirement Income And Lifestyle Planning
vs.
A Guaranteed Lifetime Income Solutions Approach To Retirement Income And Lifestyle Planning
- Two Inherently Different Mind-Sets

As mentioned in the introduction, one of the most important decisions you will make about your retirement income and lifestyle plan is whether you choose:
(1) a flexible systematic withdrawal approach,
(2) a guaranteed lifetime income solutions approach, or
(3) a combination of approaches - to create a sustainable retirement income and lifestyle plan out of your retirement nest egg - so you do not outlive your money.

From a financial perspective,

retirement income and lifestyle planning is all about cash-flow.

Due to a combination of historically low interest rates, the sobering effect of stock market crashes, and individuals living longer, current prudent thinking is that you can safely withdraw around four percent (4.00%) of your initial retirement nest egg portfolio, adjusted for inflation each year thereafter (to supplement Social Security Benefits, pension, rental income, part-time work and so forth) without outliving your money.

For example, if you plan on retiring with a $1,250,000 retirement nest egg, then you multiply four percent (4.00%) times $1,250,000 to calculate the estimated withdrawal amount needed to sustain your retirement income and lifestyle in year one of retirement, as follows: 

$1,250,000 x 4.00% = $50,000 withdrawal amount in year one of retirement 

Then, you need to adjust for inflation to calculate the target retirement income withdrawal amounts for future years. For example, if you assume a 3.00% annual inflation rate, then: 

Year               Withdrawal Amount Needed To Maintain Your Retirement Lifestyle
Year 1            $1,250,000 x 4.00% = $50,000 initial target retirement income withdrawal
Year 2            $50,000 + 3.00% adjustment for inflation = $51,500 withdrawal
Year 3            $51,500 + 3.00% adjustment for inflation = $53,045 withdrawal
Year 4            $53,045 + 3.00% adjustment for inflation = $54,636 withdrawal
Year 5            $54,636 + 3.00% adjustment for inflation = $56,275 withdrawal
Year 6            $56,275 + 3.00% adjustment for inflation = $57,964 withdrawal
Year 7            $57,964 + 3.00% adjustment for inflation = $59,702 withdrawal
Year 8            $59,702 + 3.00% adjustment for inflation = $61,494 withdrawal
Year 9            $61,494 + 3.00% adjustment for inflation = $63,339 withdrawal
Year 10          $63,339 + 3.00% adjustment for inflation = $65,239 withdrawal
And so on and so forth throughout your retirement years. 

Important Note: Investors often incorrectly assume that The Four Percent (4.00%) Rule For Retirement Portfolio Withdrawals means that you withdraw 4.00% of your portfolio balance each year which is not the case.

The Four Percent (4.00%) Rule For Retirement Portfolio Withdrawals

The greatest financial risk that most retirees face is running out of money. As modern medicine continues to improve, it's difficult to estimate how long you will live and, consequently, how long your money will need to last. As a result, longevity risk has stepped to the forefront of the retirement income planning process. 

According to the National Association of Social Insurance, an average 65-year-old male can expect to live 19 more years, to age 84; while an average 65-year-old female can expect to live about 22 more years, to age 87. In addition, nearly three in 10 men and four in 10 women age 65 today can expect to reach age 90.

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What Happens When The Paychecks Stop?



One of the most important financial decisions you must make when you transition to retirement is how to create a sustainable retirement income and lifestyle plan out of your retirement nest egg. 

Should you:
(1) take flexible systematic withdrawals from the assets that you have accumulated over the years that are subject to market fluctuations,
(2) purchase guaranteed lifetime income solutions, so you do not risk outliving your money (longevity risk).

From Building A Nest Egg To Transitioning To Retirement


   Retirement Income Planning

You work most of your life to build up a retirement nest egg.  

When you retire, the paychecks stop coming and you must transition from accumulating assets for retirement ("the accumulation growth phase") to turning your retirement nest egg into income during retirement ("the decumulation income phase"). 

While some individuals simply want to watch their investments grow over time before retiring, with no particular goal in mind, other individuals have a preconceived milestone that they envision reaching. For example, you may follow the "$1 million payday approach" (or some other preconceived figure), whereby you plan on retiring once you have $1,000,000 in investments and savings put away. 

Wall Street firms and insurance companies spend a ton of marketing dollars promoting ways to calculate your magical "retirement number", the amount your retirement nest egg needs to grow to in order for you to retire comfortably. 

However, despite what all the sales propaganda may lead you to believe, the fact of the matter is that the retirement income planning process is not an exact science – it is a process. There are several important moving parts involved – investment and non-investment related – and they evolve over time. 

Each investor's situation is different, and your "retirement number" will most likely be impacted by:
(1) controllable investment and retirement income variables - such as Social Security, pensions and guaranteed lifetime income solutions,
(2) uncontrollable investment and retirement income variables – such as stock market returns, Sequence Of Returns Risk, inflation, etc.
(3) controllable non-investment related variables – for example, when do you plan to retire, where do you plan to live during retirement, what retirement income and lifestyle do you envision (that you can realistically budget for), etc. and
(4) uncontrollable non-investment variables – such as your health, longevity (how long you will live), etc.

There are countervailing benefits to each approach. You may find that the optimal solution is not 100% of one approach, but rather a combination of approaches.

How Large Does Your Retirement Nest Egg Need To Grow To?

If you take a guaranteed lifetime income solutions approach, you are looking beyond the ongoing obsession with account balances and annual returns, which are far less important than the amount of sustainable lifetime income you can expect to receive for the rest of your life, no matter how long you live (to supplement Social Security benefits, pension income, rental income and so forth). You know exactly what your guaranteed lifetime income will be - to the penny - each year for the rest of your life. 

For example, if you are preparing for retirement, or in retirement - you can purchase an Immediate Income Annuity from an insurance company and receive guaranteed income payments for the rest of your life starting immediately - and/or you can purchase a Deferred Income Annuity and receive guaranteed income payments for the rest of your life starting at a specific time in the future. 

With company pension plans increasingly becoming relics of a bygone era, Immediate Income Annuities and Deferred Income Annuities enable you to, in essence, create your own pension-like guaranteed income streams for life (together with Social Security and your company pension, if you are lucky enough to have one), completely insulated from the performance of the stock market. 

While Immediate Income Annuities and Deferred Income Annuities aren't for everyone, they are great transfer of risk strategies that specifically solve for principal protection, guaranteed lifetime income, and legacy planning. If you need to solve for one of these items, then you may want to consider adding an Immediate Income Annuity and/or Deferred Income Annuity to your portfolio to deliver the guaranteed part of your retirement income and lifestyle plan - to lower the risk of your overall investment portfolio - and to help solve for longevity risk so you don't outlive your money.

Step 1: Begin by developing a retirement expense budget to fund the retirement lifestyle you envision in year one. 

For example, let’s assume that you budget $50,000 for year one of retirement to fund your retirement lifestyle (after accounting for Social Security benefits, pension, rental income, part-time work and so forth). 

Step 2: Calculate how much your retirement nest egg needs to grow to by dividing your annual budget amount by the four percent (4.00%) rule for retirement portfolio withdrawals. 

$50,000 / 4.00% = $1,250,000. 

In this example, $1,250,000 is the estimated amount that your retirement nest egg must grow to in order to create a sustainable retirement income and lifestyle. 

Depending upon the taxable status of your portfolio, if all of the retirement savings are in qualified accounts (such as a 401(k) or Traditional IRA), then taxes on the withdrawals will increase your expense budget amount - and the amount that your retirement nest egg needs to grow to. 

Keep in mind that the four percent (4.00%) rule is a rule of thumb. You may want to be more conservative and withdraw less, or be more aggressive and withdraw more. And as you venture into retirement, you may need to make adjustments to your withdrawal rate to meet changing retirement income and lifestyle variables. 

If pure flexibility and growth is your goal, and you are comfortable with shouldering all of the risk in your portfolio, then you may feel more at ease sticking with a flexible systematic withdrawal approach to fund your retirement income and lifestyle needs.​ 

However, if you are concerned with sequence-of-returns risk, emotion-based investing that oftentimes results in performance chasing and poor investment results, or the travails of cognitive decline, then you may feel more at ease with a guaranteed lifetime income solution approach to fund your retirement income and lifestyle needs – so you do not outlive your money.

What's A Safe Amount To Withdraw From Your Investment And Retirement Income Portfolio Each Year Without Running Out Of Money?

Proponents of A Flexible Systematic Withdrawal Approach To Retirement Income And Lifestyle Planning argue:
(1) You can obtain a reasonable income stream for life,
(2) You can maintain control over, and flexibility of, your investment and retirement income portfolio,
(3) A well-diversified, long-term portfolio should safely support a spending plan without dwindling your wealth, while also preserving your liquidity and upside potential, and(4) Safe withdrawal rates provide a "floor-with-upside approach", with the potential for greater spending or a growing legacy, IF your portfolio performs well during retirement.

A Flexible Systematic Withdrawal Approach To Retirement Income And Lifestyle Planning

Longevity Risk

is the biggest threat to a successful retirement....

Will you outlive your money?

Opponents of A Flexible Systematic Withdrawal Approach To Retirement Income And Lifestyle Planning argue:
(1) Sequence-Of-Returns Risk - If you rely solely on a flexible withdrawal plan, the success (or failure) of your long-term investment and retirement income plan will be at the mercy of Sequence-of-returns risk - retiring before a bear market begins or during the early stages of a bear market – which is one of the biggest risks facing retirees who rely on a flexible systematic withdrawal plan. 

The specific sequence of market returns matters significantly during the withdrawal phase of retirement when the impact of draw downs (losses) is especially magnified.

Immediate Income Annuities and Deferred Income Annuities enable you to, in essence,

create your own pension-like guaranteed income streams for life...

completely insulated from the performance of the stock market.

Social Security, your pension (if you are lucky enough to have one), Immediate Income Annuities and Deferred Income Annuities make up the guaranteed lifetime income portion of your long-term investment and retirement income plan. 

The primary goal of purchasing guaranteed lifetime income solutions is not to invest to maximize returns, but instead, to maximize the chance of being able to meet your future retirement income and lifestyle plan needs and not outlive your money. The focus is not on the value of your portfolio, or to make as much money as possible - the focus is on cash-flow and the ability of your portfolio to meet your retirement income and lifestyle plan needs for life - regardless of what the stock market is doing. 

A Guaranteed Lifetime Income Solutions Approach To Retirement Income And Lifestyle Planning