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  • Nicholas Pihl

Why Investing During Retirement is Different from Investing FOR Retirement

You have been working hard for most of your life, contributing to retirement accounts, and hoping for the best rate of return you could get. Most of your investments were probably long term, and your game plan during recessions was probably some version of "don't look at the account, keep working, and keep saving." And that's exactly the right approach when you're accumulating assets. Good job!


The reason that this was the right thing to do, during your working years, is that you had a long time horizon. A typical 40 year old has 20-25 years until retirement, which is ample time for depressed investments to recover their value (and then some!).


However, this changes as you approach your retirement years. Someday soon, you'll need to start living off that money. And what's more daunting, you'll need to make it last for the rest of your life. This calls for a change in your investments. Failure to adapt may jeopardize your dream of a long and happy retirement.


The worst case scenario for a new retiree is a big drop in their portfolio immediately after leaving their job. Having lost the income from their job, they need to draw funds from the portfolio. When your portfolio has declined significantly, each month of living expenses represents a larger percentage chunk of your portfolio.


As an extreme (but not unheard of) example, picture someone retiring in January of 2008, whose portfolio is invested entirely in stocks. Over the ensuing 13 months, they likely saw the value of their investments get cut in half. While they may have started with a relatively safe 4% annual withdrawal rate*, soon, they are withdrawing 8% of their portfolio's value each year just to maintain the same lifestyle. That's double the recommended pace.


Worse still, each dollar they spend while the market is depressed is a dollar that doesn't participate in the stock market's recovery. Their losses are permanent, and the impact on their financial stability is amplified over the ensuing decades. Remember, a 60 year old retiree needs 30-40 years worth of income from their portfolio. So doubling the withdrawal rate early on more than doubles the likelihood of running out of money later.


Thus, this over-aggressive retiree may find that their retirement income is permanently reduced to a fraction of what it would otherwise be. They either need to cut their lifestyle dramatically (and lose out on the life opportunities they'd looked forward to enjoying in retirement), or they massively increase the likelihood that they will run out of money at some point in their lives.


Retirement (and especially those first few years) requires a different type of portfolio from what you're used to. Whereas what used to matter was absolute return, what matters most retirement is risk. Not only do you need to keep adequate reserves of liquidity (and keep these reserves safe from market volatility), you also need to make sure that this liquidity is periodically replaced by your other investments.


It's harder than you might think.


Why? Most growth investments, like stocks, have very long periods of underperformance. In between these periods of underperformance are boom-times that commonly last 10-15 years. But bear markets can last 10 years or more. The longer and deeper the drawdown, the greater the damage to your portfolio, and the more likely you are to run out of money.

The tech-heavy, high-growth NASDAQ index, for instance, peaked in early 2000 and did not recover its former heights until 2015.**


Over that same span of time, a 60 year old ages into a 75 year old. Which isn't to say a 75 year old can't have a good life. It's just that every 75 year old I talk to gives the same advice, "enjoy it while you can, I wish I'd retired earlier." You can't get back time. Today is the youngest you're going to be for the rest of your life.


The key issue to avoid here is "lumpiness." Growth stocks, like those that constitute the NASDAQ index, are prone to booms and busts. Burst bubbles take many years to recover, and most retirees do not have the luxury of waiting a decade or more to draw from a depressed portfolio.


That's why, at Pihl Financial Planning, my investment objective is "No Bad Decades." Because I work specifically with retirees, I've developed a specialized investment approach that focuses on minimizing the risk of deep and prolonged drawdowns, so that retirees can reap a lifetime of reliable income.***


This strategy focuses on:

  • Avoiding bubbles that take 10+ years to recover (if ever)

  • Maintaining an adequate reserve of safe assets to outlast bear markets

  • Including only on assets with a favorable return profile, relative to risk

  • Refusing to take unnecessary risks

  • Diversifying across assets that have low correlations with each other

To learn more about how I can help protect your retirement, schedule an appointment at: https://calendly.com/pihl/

*the 4% withdrawal assumption depends on a number of factors such as age, portfolio composition, health status, timing of social security, etc.

**This ignores dividends, but dividends are not a large component of the NASDAQs total return.

***As with all things in life, there are no guarantees; some things are beyond our control. I do, however, believe that I help retirees avoid the biggest mistakes, and help maximize the likelihood that each retiree's financial objectives will be met. The core of what I do is to help protect the assets that clients have worked their whole adult lives accumulating.


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