“If your retirement income plan depends on an accurate prediction of the markets, you are doing it wrong”
If you are retired and the recent volatility in the markets is keeping you up at night, we need to talk. You likely either do not have a retirement income plan, have the wrong retirement income plan, or have forgotten how your retirement income plan works. Now, I’m being a bit facetious as it’s also possible you just have too much money allocated to stocks as Shane pointed out in his April 7, 2025 Market Commentary, but assuming you are appropriately allocated, and you have a sound retirement income plan, this volatility shouldn’t be worrying you. I’ll unpack these scenarios one at a time and offer a solution that will give you the most certainty and the best chance of living comfortably without running out of money.
Possibility #1: You do not have a retirement income plan. If this is you, you have plenty of company as many people fall into this category. You may be collecting social security income, maybe have some real estate rental income, and perhaps even have some part time income. You have some money invested, perhaps too aggressively, because you are trying to generate the highest possible return. The income you have is not enough to cover your expenses so from time to time you are forced to sell some of your market investments to generate additional cash to live. Essentially, in this situation, you are closing your eyes, crossing your fingers, and hoping something good happens. Given the current economic environment and corresponding uncertainty, markets are in a downtrend and we don’t know how far down they may go or when the bleeding will stop. The further stock share prices decline, the more shares you must sell to provide the number of dollars you need to cover the balance of your expenses. The longer this goes on the more worried you get about running out of money. You are wishing there was a better way.
Possibility #2: You have the wrong retirement income plan. The financial services industry is an enthusiastic supporter of something called a Systematic Withdrawal Plan. This plan is similar to having no plan but there is at least some structure and thought behind it. With this plan, Advisors will provide evidence that if you withdraw a given percentage, often 4% of your investments annually, if markets do what they have done in the past, you can live 30 years and not run out of money. Conveniently, they will tell you to “leave all your money invested with me” and liquidate securities each month and send cash to your bank account.
There are several issues with this retirement income plan, the most obvious of which are: 1. What happens if you or your spouse live more than 30 years? 2. What happens if 4% isn’t enough? 3. What happens if markets don’t do in the future what they have done in the past? The less obvious issues are: 1. What happens if market returns are negative in the early years of your retirement? 2. Who benefits more from this plan…you or the advisor who suggested it? I’ll let you answer the second part based on your experience, but you need to understand what happens if market returns are negative in the early years of your retirement.
Below, I have provided a spreadsheet we refer to as our Sequence of Returns Calculator. The top left set of numbers represent a scenario where the average rate of return for the first 20 years of your retirement is 5%, starting with $1M and withdrawing 5% annually, adjusted for 3% inflation. Your total income is $1,342,518 and your ending balance is $870,275. If this is how it works out for you, congratulations! You were lucky enough to retire at or near the beginning of a bull market. In the top right set of numbers, the assumptions are the same, but we’ve reversed the sequence of the market returns, so the -25% now happens in the first year instead of year 20, and so forth. Given the early negative return, the results are dramatically different. In this scenario you have total income of $960,128 and are out of money in year 16. Yikes, not good. So, what was different? The order in which the market delivered positive and negative returns and the magnitude thereof. Question for you…How much control do you have over the stock market? Right, zero. That’s what I thought.
Possibility #3: You have forgotten how your retirement income plan works. If you have adopted the Elevate Income Plan (imaged below), allow me to remind you how it works to give you the best chance of living comfortably and never running out of money. Start by classifying your expenses into needs and wants. Needs are things you are not willing to live without. Wants are everything else. Add up your sources of highly reliable, or better yet guaranteed, sources of income. If your needs (aka guaranteed expenses) are more than your guaranteed income, use some of your savings/investments to create enough additional guaranteed income to fully cover your needs.
Income annuities work well here, as does rental real estate if you don’t mind managing tenants. Set up a cash reserve and fund it with as many years of “wants” expenses as you need to feel comfortable. We do this using a portfolio of treasury bills that mature monthly and then send the cash to your bank account. Two or three years of wants money is usually sufficient. Think of this as “portfolio insurance” as the more you have the more time you have before needing to liquidate securities for expenses. Allocate your savings/investments according to your comfort level with risk. Given you have just pre-arranged for two to three years of your full income needs, you may be comfortable taking a touch more risk than you otherwise would. This will help to offset the impact of inflation over time. Once this structure is in place, short-term market movements no longer impact you as your income is taken care of for two to three years (depending on how much you funded your cash reserve). Importantly, this puts you in control of your income plan, not the market. As your cash reserve is drawn down, we look for securities in your portfolio to sell that have nice gains in them and use the proceeds to replenish your cash reserve. This dramatically reduces the need to liquidate securities when the market is declining and prices are not in your favor. Worst case scenario, you live too long and/or markets are poor for an extended period of time and your wants money gets spent, you still have your needs covered.
To wrap up, you do not need to accurately predict the direction of the stock market to create a sound retirement income plan. If you have no plan, the wrong plan, or just want to review your plan, please click here to access my calendar and schedule some time to meet. If you have already adopted the Elevate Income Plan and are now feeling reassured but have a friend or family member who could use some guidance, please call or email me with their contact information or pass this commentary along to them.
Thank you for taking time to read this planning commentary. I pray it helps you or someone you care about.
Ken Armstrong, CFP®, RICP®, ChFC®, CLU®, CASL®, CLTC
CEO & Senior Wealth Management Advisor
Elevate Capital Advisors
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