I recently met with a couple who were told by their current financial advisor that they only had a 68% chance of success in retirement.  Imagine getting on an airplane and hearing the pilot say, “Thank you for joining us on ABC Airlines.  We expect a smooth flight and should arrive at your destination in an hour and a half.  Although, there’s only a 68% chance of that happening.”  I think I’d opt for the bus if I heard the pilot say that.

After I met with the couple and completed their Retirement Evaluation and personalized Income Plan I had a completely different opinion.  The couple lives modestly with a reasonable monthly income need.  Most of that income will be met by their combined social security benefits.  The remaining income gap and supplemental income needs they have are a very small percentage of their overall retirement nest egg. 

Utilizing my plan, we have supplemental income coming from one of their accounts, and we diversified the rest of their funds into separate accounts among different portfolio managers.  Those separate accounts were not earmarked for any income at all.  This leaves those accounts to remain liquid and to be used in the future for anything the client desires.  So where did the other advisor get things wrong?

Beware the Monte Carlo simulation

A Monte Carlo simulation is a tool many advisors use to measure the probability of retirement success or running out of money.  It’s a complex tool that measures the historic risk and variability of the holdings in the portfolio.  Click here for a more detailed explanation.  I do not use a Monte Carlo simulation because it doesn’t take into consideration the guaranteed nature of some of the retirement vehicles we use with our clients.

What make income sustainable?

Generally, sustainability is measured by the percentage withdrawal being taken and whether we have the ability to meet or exceed that percentage with the growth we get from the asset. 

For example, if we are withdrawing 3% from an account, do we have the ability generate a return greater than 3%?  If the answer is yes, then it is sustainable. 

The other element we use is to make sure not all the assets are earmarked for income. 

For example, let’s say a client has $500,000 in their portfolio and needs $10,000 in additional supplemental income outside of their social security.  For that person, we would use multiple portfolio managers to add diversification of portfolio management to the mix.  We’d use $250,000 to generate $10,000/year (4% withdrawal rate).  The remaining $250,000 would be managed separately and not have any income responsibility.  Should the income producing account underperform, we can always use the liquid accounts to pick some of the income responsibility and take pressure off the original income producing accounts.

Don’t discount the use of an annuity

Annuities are typically the first place I turn to when a client needs supplemental income.  The reason for this is because most annuities offer guarantees against stock market losses. 

Let’s say you’re 100% invested in the stock market and we’re in a correction and your accounts are down 20% (sound familiar?), yet you still need to take out 4% for supplemental income.  After the withdrawals your accounts are now down 24%.  Let’s also say you started with $100,000.  After the withdrawal and market correction, your account is now worth $76,000 and your $4000 withdrawal is now a 5.26%.  This could quickly erode your asset and increase the risk retirement failure. 

If the $4000 withdrawal had come from an annuity, your account balance would be $96,000 and your withdrawal percentage would only grow from 4% to 4.16%.  Watch this 14 minute webinar to see if an annuity can be a good place for a portion of your portfolio.

We encourage you to get a second opinion on your ability to retire.  We offer complimentary Retirement Evaluations to all our clients to assess your ability to retire. 

Click to schedule your Retirement Evaluation or call our office at (480) 428-8005.

Written by Marc Montini, IAR and licensed fiduciary.

The commentary on this website reflects the personal opinions, viewpoints and analyses of the author, Marc Montini providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.

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