Old Ceiling, New Floor
For most of an investor’s life, markets trend higher, savings accumulate, and investment portfolios climb. As this happens and the portfolio reaches new heights, the old ceiling becomes the new floor. As humans, we always want to be progressing. Seeing a number increase is an easy way to measure our progress towards a goal.
But there comes a time when saving will stop and spending will need to begin. Yes, markets will likely continue to trend higher over time, but it is very likely that the investment portfolio you have been growing for 30+ years could begin to decrease in value; both nominally and especially in an inflation-adjusted (real) sense. With this in mind, your portfolio could reach a peak you will never see again. Becoming comfortable with this process can be challenging.
Historically, the majority of accidents on Mt. Everest do not happen on the way up but rather on the way down. There is a different skill set needed for asset decumulation as opposed to accumulation. What got you to the peak will not likely get you down.
Generating Income Is Different Than Accumulating Savings
This is true with savings. One could easily make a single decision on how much they are going to invest regularly and place that into a one investment fund and not change anything for years, if ever. This “static” approach is likely to be a successful saving strategy for most people.
In decumulation, using a static approach of a set dollar amount or percentage could lead to undesired outcomes, given the normal fluctuations in the market and changing spending needs. This same rigid consistency that was very beneficial when saving could become disastrous when spending.
Using a Dynamic Approach for you Retirement Income
As a result, we suggest using a “dynamic” approach that allows the flexibility to make changes to your spending as you go based on parameters you set out ahead of time. By creating these rules or “guardrails” it allows you to make adjustments as your needs or the market changes.
Questions to Ask in a Dynamic Withdrawal Strategy:
- What are your income goals?
- What is the initial amount you will withdraw?
- Will you adjust your withdrawal amount in response to market fluctuations?
- Will there be a “ceiling” or “floor” to your spending?
- Will you adjust your withdrawals for inflation?
- Where will your withdrawals come from?
Of course, this approach must be tied to your financial plan and investment strategy to make sure it is in alignment with your goals. Creating an income in retirement is an ongoing process that requires regular monitoring and adjustments. Western Reserve Capital Management is here to help you make those adjustments and adapt to the changing environment.
Feel free to email us at info@westernreservecm.com with any questions you have.
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