Overview

Investing during retirement is completely different than investing for retirement. The requirement to generate liberal, consistent, and reliable income over a long-term, indefinite time horizon changes the problem in a fundamental way.

During the accumulation phase it is completely rational and consistent to take a full measure of global equity risk in return for the probable higher returns. The emphasis is correctly placed on attaining the highest possible accumulation.

At retirement the objectives change: Generate income, and don’t run out of money! An entirely different strategy is called for.

Retirees have several key concerns:

· How much can I safely withdraw?

· How can I make my nest egg last forever?

· Can I hedge the portfolio for inflation?

· If anything is left over, how can I get the most to the next generation?

Several factors complicate the retiree’s problem:

· Fixed dollar withdrawal programs increase investment risk and introduce the possibility of self-liquidating the portfolio during extended market declines.

· Time horizons are extended, but cannot be predicted exactly in advance. The average life expectancy for a couple age 60/55 is 32.3 years.

· Inflation is embedded within government policy. We cannot count on it going away.

· Taxes are a dead drag on performance and the largest expense investors face.

· Because investment returns are finite, expenses must be rigorously controlled.

· IRA and pension forced withdrawals at age 70 ½ may accelerate receipt of principal and its taxation far in excess of needs.

· Beneficiary selection and estate planning is complex due to the intersection of IRA withdrawal rules, income and estate tax considerations.

Decision-making is complicated by uncertainty. Most of the factors that determine success or failure are beyond our direct control. Retirees cannot control or predict market returns, interest rates, or even their own mortality. So, we must focus on the things that we can control, and devise a conservative investment strategy that will yield the highest probability of success.

Because no two retirees have identical situations or objectives, each case must be individually considered. A comprehensive approach will consider all the complicating factors before reaching a solution. No single facet can be considered in a vacuum. The process is a little like putting together a puzzle with many parts. Some compromise may be necessary, and retirees must face up to the possibility of mid-course corrections.

Next: Sustainable withdrawal rates

Copyright ã 2000 Francis C. Armstrong