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Is Your Portfolio Overworked?

Brice Carter, CFP®, ChFC®, CIMA® 

You likely have a coworker or friend who never takes a day off of work, who's dedicated to their job and who rarely takes a vacation, sick day or comes in late. When you love your job, it can sometimes be easy to let the little things pass by. But you all know that overwork can be detrimental to your health. And just as you should be taking care of your physical health, you should be taking care of your portfolio's health. 

The toll that overwork can take on the health of a person is similar to the toll overwork can take on a portfolio. As a certified financial planner who works with retirees, I have witnessed that failing to provide your retirement assets with metaphorical sick or vacation days can put those assets in poor health.

How Hard Is Your Portfolio Working?

It's been said that Thursday is the new Friday, as more Americans are working only four days a week. In this low-interest rate environment, most financial experts are recommending letting your portfolio work a little less as well. With recent studies showing the new safer withdraw rate less than 3%, the days of 5 to 6% are, for now, seemingly in the past. To determine if your portfolio needs to work a little less you first must determine how hard it is currently working, which can be done by determining your current withdraw rate. A withdraw rate is simply the amount of income you are taking from investment accounts each year divided by the total dollar amount of these accounts. 

Once you know what your withdraw rate is, you can make a determination as to whether or not this is a “safe" amount; one way to overwork a portfolio is simply to withdraw funds at an unsustainable rate. So if your withdraw rate is not healthy, you essentially run the risk of outliving your money. To combat this risk, decrease the amount of income you are currently taking, although this is often a less than desirable solution. Another option to consider is purchasing an income annuity. 

Income annuities (which are not suitable for every investor) help combat the risk of outliving your money in a few ways. The first and most notable is that you cannot outlive the income stream of a guaranteed lifetime income annuity. Note that all guarantees are subject to the claims-paying ability of the issuing company. Even if you were to spend down the rest of your assets, you can find some comfort in the fact that the portion of assets that you placed into the income annuity will provide income for the rest of your life – and potentially your spouse, depending on the income option you chose.

The second way that an income annuity can help the longevity risk problem is the fact that many income annuities provide payout rates at a rate that far exceeds what is considered to be a safe withdraw rate from portfolios. This could decrease your withdraw rate and essentially take your portfolio from a five day work week to a three or four day work week. With all financial products, there are pros and cons to this strategy, so if this is something you are considering, research and evaluate those pros and cons carefully.

Set Up Sick Days For Your Portfolio

The old rule of thumb for a safer withdraw rate over a 30-year retirement is 4%. Now let’s assume for a minute that a 4% withdraw rate on a $500,000 retirement account ($20,000 a year) is, in fact, your plan. Hypothetically, if your portfolio were to lose 25% of its value in the first year of retirement (think 2008), all of a sudden your $20,000 a year is significantly more than the 4% withdraw rate based on the new account value. If you still need this income to sustain your retirement lifestyle, you could now be facing a precarious problem. The act of taking withdrawals from your portfolio while the market is down is essentially selling low and locking in losses. This leaves fewer assets in your account working for you as markets begin to recover. 

In order to avoid “selling low,” you should consider building sick days around your portfolio. To build sick days, we often recommend the three bucket approach, which places assets into three categories: short-term, mid-term and long-term needs. The short-term assets are typically equal to the amount of income you will need in the next two to four years and in highly liquid safe investments. This short-term bucket creates your sick days. If your mid- and long-term (risky) buckets experience significant losses in a given year your income can still be supplied by the sick day fund. By having two to four years’ worth of income set aside in safe liquid investments, you are providing a timeframe for which the rest of your assets can recover from market corrections. As your mid- and long-term buckets recover, you can refill your sick day fund. 

Build Your Own Benefits

I’m confident that if all else is equal, nearly everyone would prefer a three-day work week over a five-day work week. I’m also confident that almost everyone would prefer to have an abundance of sick days rather than none.

Unfortunately, most of us do not have the luxury of choosing these benefits for our working career. However, for our retirement accounts, we can choose to provide ourselves with a short work week and plenty of sick days. These benefits are in many ways exclusively dependent on the planning that we do today. By taking the time to plan appropriately for the long term health of your portfolio, not only can the health of your portfolio improve, but your physical health can improve with the peace of mind sound benefits and planning can provide.

The commentary in this article reflects the personal opinions, viewpoints and analyses of Brice Carter, and should not be regarded as a description of advisory services provided by Financial Strategies Group, INC or performance returns of any Financial Strategies Group, INC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this article constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Financial Strategies Group, INC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


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