Archive for April 24th, 2012

Make a mistake now and there is a good chance you will have to be satisfied with a meager lifestyle for the rest of your life or worse your money will run out before you die.  You have worked long and hard to save for your retirement.  Now you are hoping it is enough to maintain your lifestyle and last the rest of your life.    Up until the point of retirement the emphasis is on accumulation of dollars and getting the highest return.  Managing money during the distribution phase is a skill few people or even money managers have been taught. 

The 2 most common retirement distribution mistakes are not considering the effect on your money of the sequence of returns and negative compounding.  

Many money management people will tell you that you cannot control the sequence of returns; this is certainly true if your money stays in a market based portfolio.  No one can provide an accurate prediction of future market returns, making it critical to move retirement income money out of these volatile investments and into safe money instruments.  

Negative compounding is the loss of principal when stocks or bonds decrease in value (brokers say don’t worry this only a paper loss) combined with having to sell the asset for income while it is worth less than you paid for it.  (to view table click here)

With your money in safe places negative compounding is easy to control because losses do not occur making it easy to maintain your income and budget which in turn leads to a stable fulfilling lifestyle. 

These are new problems previous generations did not face because they had guaranteed pensions making it unnecessary to self-fund all their retirement years. Even in these incredibly uncertain times running out of money is not an option.  

You may ask questions in the comments or contact me privately Tim Barton, ChFC