727.441.9022
611 Druid Rd E • Suite 105 • Clearwater, FL 33756
WHO CARES ABOUT SEQUENCE OF RETURNS? YOU SHOULD!
90 TAMPA BAY MAGAZINE | JULY/AUGUST 2018
V. Raymond Ferrara, CFP®
Chairman
Chief Executive Officer
Eric R. Ebbert, MBA, CFP®
President
Chief Operating Officer
Equity markets in the US are near all-time highs and interest
rates are coming off historic lows meaning bonds are expensive
too. For those getting ready to retire, a bear market in these two
asset classes, especially at the same time, could have a significant
negative impact on portfolio values which in turn could affect the
planned retirement lifestyle.
Let’s suppose that you are retiring with $1 million in savings.
Most financial planners will tell you that a “safe” withdrawal rate is
4%, or $40,000 per year. If after withdrawals the investments grow
then you might consider taking 4% of the higher number. But what
happens if the value goes below $1 million? You need to take a
smaller amount which reduces your lifestyle. Who likes that idea?
However, there is a bigger issue. You need to wait until the
portfolio returns to the $1 million level before returning to your
expected lifestyle and that could be a long time. If your portfolio
declines by 15% in a bear market and you withdraw the 4%, the
value of the portfolio is now $810,000 and it takes a return of 23.4%
just to get back to even without taking into account any future
withdrawals.
Bear markets (a downturn of 20% or more) generally occur once
every four years, but we have not had one since March 9, 2009.
Therefore, if you are newly retired, or going to retire in the near
future, the likelihood of a bear market in equities sometime over
the next few years is high; but no one knows for sure when it might
occur. The last thing you want to do is to sell part of the portfolio
at the wrong time. So what can you do to potentially protect your
cash flow over time?
First, let’s talk philosophically. Maybe you have enough money
that a downturn will not really affect your lifestyle. Good for you.
No need to read further; or maybe there is. We believe in taking
no more risk than is necessary to support your lifestyle throughout
retirement. If adding more risk doesn’t bring any value to your
life, why are you taking that increased risk? There is no reason to
jeopardize a lifetime of savings.
Here are two of the many cash flow management strategies.
First, keep about 18 months of living expenses in cash and/or cash
equivalents. No, you will not earn a lot of interest in today’s world,
but that is not the point. The cash equivalents and the income you
earn from the invested portfolio should provide enough cash flow
for approximately 24 months. When the downturn occurs, you
draw against the cash reserves; this gives the invested portfolio
an opportunity to potentially recover without having to sell on
the way down.
A second option is the bucket approach. Here you segment your
investments into buckets of generally five year increments and
invest the money in such a way as to replace the previous bucket
when it is empty. Each of the buckets starts with $200,000 which
is designed to provide $40,000 per year cash flow. The potential
earnings over time as you get to the next bucket will hopefully
provide for a higher pay out to adjust for inflation. The first bucket
is invested in cash and short term bonds while the second bucket
to be used in five years would have intermediate bonds. The third
bucket would be split about 50/50 between stocks and bonds, the
fourth bucket would be funded with a split of 75% equities/25%
bonds. The final bucket would be invested 100% in equites. As each
bucket comes due it is converted to cash and short term bonds for
the next five years. Sounds simple, but it takes skill and discipline
to use this approach.
If you are within five years of retirement, or already retired, it
is important to have a written cash flow plan. You worked long
and hard for your money and now it is time for your money to
work hard for you.
Please take advantage of our complimentary introductory meeting
to discuss your retirement cash flow plan by calling 727-441-9022.
By the way, we will be opening our Tampa office in the Westshore
area in late summer.
About ProVise Management Group, LLC: ProVise is a financial planning and investment management firm registered with the Securities and Exchange Commission (SEC)
and has been in business since 1987. Our 13 professional advisors serve approximately 1100 clients in over 30 states. As of 03/31/18 we were managing approximately
$1.41 billion for our individual, corporate, not-for-profit and 401k retirement plans. Please visit our website at: provise.com. Investment Advisory Services offered through
ProVise Management Group, LLC. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations
are complex and are subject to change.