Broker Check

September Newsletter

September 3, 2021


“We Welcome Nest Eggs”

In September we watch as the kids return to school, the leaves begin to change and the weather becomes crisp and cool as we transition into autumn.   Similar to this, the transition into the financial “distribution phase” occurs as we retire, and it requires the investor and portfolio manager to shift their thinking and use a different set of skills to manage investments.  You are no longer saving for that day sometime off in the future; you have arrived.  Now the central questions become “Have we done our job and saved enough for our needs?” and “How do I make my savings last for my lifetime?”  These are the two central questions we advise clients on when they are nearing or in retirement, so they can have an enjoyable financial experience in their “golden years”.

To be successful in this phase of your investment planning, you need to understand how your distribution rate will impact your financial balances and the longevity of distributions.   The seminal research on distribution strategies centers on a four percent target which allows for periodic adjustments in inflation with a ninety percent plus probability of not running out of money after thirty years.  Additionally, following the “four-percent rule” for distributions has historically shown approximately two thirds of the time that an investor could have more money at the end of thirty years: not a bad outcome!  The risk (and there are always risks), is to make sure you are not part of the one-third group that has less than what you started with or that you do not fall into the ten percent group that runs out of money.  Our focus as portfolio managers and financial planners is to guide client expectations given each client’s range of financial needs and the needs which come up while traveling the path to and through retirement.

The most crucial period for retirement planning occurs immediately before you plan to retire as well as the first couple of years in retirement.  A reduced equity allocation is often appropriate to minimize what happens if the equity markets are in a down cycle during this crucial time.  If the market is down just prior to retirement, it reduces your initial distribution target amount in retirement. If the market is down the first few years of retirement, it will disproportionately impact the results of your portfolio and the amount of money you can reasonably take throughout your retirement. Getting the most out of your nest egg is a balancing act.  You don’t want to run out of money, but you shouldn’t miss out on the full use of what you have accumulated over your working career.

I have been studying withdrawal strategies and portfolio models in depth in recent months as I begin my tenth year as a CFP (Certified Financial Planner) practitioner.  Each time I renew that designation I must certify that I have completed at least thirty hours of approved continuing education in the field.  As a professional goal, I try to double the number of hours of continuing education required for each two-year renewal period.  I have found some interesting material which talks about the utility of your nest egg and what distribution strategy yields the greatest benefit. This is done through calculating the total amount of your distributions in retirement and adding projections of what might be left at the conclusion of those years, based on reasonable assumptions and reviewing results of past performance. If someone is aggressive, they may choose to use all their money and run the risk of using it up too soon. If someone follows the four percent target, they may have a larger cushion and more can be left to their heirs.  We continue to have multi-generational portfolios that provide financial security for future generations.

Research has revealed that with a thirty-year time horizon and a four percent withdrawal rate from a sixty percent equity, forty percent income portfolio, that portfolio will yield the most financial benefit, while still providing meaningful distributions.  For every one percent increase in the distribution rate, you lose ten percent in total utility. So, a distribution rate in the six to eight percent range could reduce your total utility by as much as forty percent!  A lower than four percent long-term withdrawal rate, increases the balance remaining; but, in most cases, may not provide enough for your budget in retirement.  When we meet with clients to review their portfolio and Investment Policy Statement, we “run the numbers” and realign portfolio allocations accordingly.  This process is particularly important as retirees deal with increasing inflation and the prospect of reduced social security benefits as current and projected distributions to retirees exceed current contributions into the social security system.

With the rise in the Covid Delta variant, inflation, federal tapering and global turmoil (think Afghanistan), we are currently evaluating the need to “protect” portfolio principal and gains. The CNN Money Fear & Greed Index, “which measures investor sentiment”, recently hit the extreme fear level as events unfolded in Afghanistan.  On the flip side of this, FOMO, “the fear of missing out”, has been fueling a continuation in the market rally since the Pandemic began.  While corporate earnings for the second quarter were exceedingly strong, profit growth is expected to cool in the second half of the year and into 2022, although earnings are expected to be solid. The ridiculously low bond interest rates have pushed up equity prices as TINA, “There Is No Alternative”, rules the day. We continue to weigh all these factors as we take gains and move them to the “bank”. As an example, we recently added another alternative income position which pays over four percent for the next seven years.

Laura, Helen and Jeannie have been working on implementing new technologies in our office. These upgrades will keep client information more secure and speed up the time in which we can get things processed for you.  Because of these improvements, we can take on new clients and we feel confident we can manage their assets to the same professional level as we manage all our current clients.  If you know someone who could benefit from our style of Intelligent Investment Management, please have them contact us.  Your referrals are the backbone of our growth and continued success.

In the Brost household there is a different transition happening.  Late August brought us to the beginning of school with Kyla now in 7th grade and Keagan starting Kindergarten. We hope you all have a safe and enjoyable autumn as we navigate through our ever-changing world.



Intelligent Investment Management, LLP