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Eliminating the Fear Factor of Retirement

“People experience retirement emotionally before they experience it mathematically.”

That may be one of the smartest things I’ve read about retirement planning. It immediately reminded me of the television show Fear Factor. Remember it? Contestants willingly jumped from helicopters, crawled through confined spaces, balanced high above the ground, and ate things most of us wouldn’t go near. The premise was simple: fear changes behavior. Sometimes it causes us to freeze. Sometimes it causes us to overreact. Sometimes it convinces us to avoid something altogether. And sometimes it makes us do things we would never choose if we felt calm, safe, and in control.

Retirement has its own version of Fear Factor. Only instead of spiders, snakes, and impossible stunts, the fears sound like this: Will I have enough? Can I really stop working? What if the market crashes? What if healthcare costs wipe me out? What if I become a burden to my children? What if I make the wrong decision and can’t recover?

Those aren’t simply mathematical questions. They are emotional questions. And until those fears are acknowledged and addressed, it can be very difficult to make confident financial decisions.

Why Retirement Feels So Emotional

Retirement represents one of the biggest transitions most people will ever make.

For decades, you receive a paycheck. You know when it will arrive. You know roughly how much it will be. You build your life around that rhythm. Then retirement asks you to turn accumulated savings into income and trust that the money will last for the rest of your life. This is a major psychological shift.

Even people with substantial savings can struggle with it. A retirement account balance may look reassuring on paper, but spending from it can feel very different. Every withdrawal can feel like a permanent reduction. Every market decline can feel like a threat. Every unexpected expense can raise the question: What if this is the beginning of running out?

This is why many retirees become overly cautious, even when they can afford to spend more. They postpone trips, avoid helping family, and deny themselves experiences they spent decades saving for.

The fear of running out can become so powerful that people never fully enjoy the money they worked so hard to accumulate.

The Science of Fear and Financial Decision-Making

Our brains are designed to protect us from danger.

Thousands of years ago, fear helped humans survive immediate threats. Today, the same biological response can be triggered by a falling account balance, a frightening news headline, or uncertainty about future expenses.

When fear takes over, long-term thinking becomes harder. We tend to focus on avoiding immediate pain rather than making the best decision for the future.

Behavioral finance has shown that people generally feel the pain of a loss more intensely than the pleasure of an equivalent gain. Losing $10,000 often feels much worse than gaining $10,000 feels good. This emotional imbalance can influence retirement decisions in powerful ways.

Fear may cause someone to sell investments after the market has already fallen, locking in losses. It may lead someone to keep too much money in cash for years, reducing growth and purchasing power. It may cause a person to delay retirement even when the numbers show they are financially prepared. It may also lead to endless second-guessing, constant account checking, and an inability to enjoy retirement.

Ironically, one of the greatest risks to a retirement plan may not be market volatility itself. It may be the decisions fear causes us to make.

Retirement Planning Should Address Both Math AND Emotion

Traditional retirement planning often focuses on projections, rates of return, withdrawal strategies, and probability-of-success calculations. Those tools are important. But they do not automatically create peace of mind. A plan can work beautifully on paper and still leave someone terrified to spend. That is why retirement planning should answer two questions:

  1. Will the money work?
  2. Will the plan help you feel secure enough to live?

A strong retirement plan should do both.

Introducing the Confidence Foundation™

At Her Retirement, I believe every retirement plan should begin by building what I call a Confidence Foundation™. Think of it as the financial base that helps you sleep well at night. The purpose of the Confidence Foundation™ is to provide dependable income for the expenses you simply cannot avoid.

Ask yourself this question: If the stock market dropped 30% tomorrow, would I still be able to pay my essential monthly expenses? If the answer is yes, you have reduced one of retirement’s biggest emotional risks.

Your essential expenses may include housing, food, healthcare, insurance, utilities, taxes, and basic transportation. These are the costs that continue regardless of what the market does. The goal is to match as much of those expenses as reasonably possible with income sources that are reliable, predictable, or guaranteed.

What Can Make Up a Confidence Foundation™?

There is no single product or strategy that works for everyone. The right combination depends on your income needs, assets, health, risk tolerance, tax situation, and goals.

For many people, Social Security forms the first layer. Because it provides inflation-adjusted lifetime income, it can be one of the most valuable components of a retirement income plan. The decision about when to claim can have a lasting impact, which is why it deserves careful consideration.

A pension may provide another dependable monthly income stream. Some retirees may also choose an annuity to create guaranteed lifetime income that helps fill the gap between Social Security, pension income, and essential expenses.

For others, a bond ladder, Treasury ladder, or CD ladder may provide predictable cash flow over a defined period. Cash reserves can also play an important role by covering near-term spending needs and reducing the chance that investments must be sold during a market downturn. Some people may use several of these strategies together.

The important point is this: the Confidence Foundation™ is not one product. It is a planning outcome. Its job is to make sure the money needed for basic living expenses is not completely dependent on short-term market performance.

Where Annuities May Fit

Annuities can be useful for some retirees because they can convert a portion of savings into a predictable income stream that lasts for life. This can be especially valuable for someone who does not have a pension, is concerned about outliving her money, or wants more certainty around essential expenses.

But annuities are not all the same, and they are not appropriate for everyone. Fees, liquidity, guarantees, riders, surrender periods, and the strength of the issuing insurance company all matter.

The question should never be: Do I need an annuity? A better question is: Do I have an income gap in my Confidence Foundation™, and what is the most appropriate way to fill it?

An annuity may be one possible answer. It should not be the automatic answer, or the answer that an insurance salesperson pushes on you.

Building Your Freedom Fund™

Once your Confidence Foundation™ is in place, the rest of your assets have a different job. I call this your Freedom Fund™.

The Freedom Fund™ is designed to help you enjoy retirement, maintain flexibility, keep pace with inflation, and support the life you want to create. It may include stock mutual funds, ETFs, individual stocks, Roth IRAs, traditional IRAs, 401(k)s, brokerage accounts, real estate, or other long-term growth assets.

Because essential expenses are already being addressed through the Confidence Foundation™, the Freedom Fund™ does not have to carry the full emotional burden of paying next month’s bills. This can make market volatility feel less threatening.

Instead of viewing a market decline as a threat to your ability to buy groceries, you may be able to view it as a temporary fluctuation in assets intended for long-term growth and discretionary goals.

The Freedom Fund™ can support travel, hobbies, family experiences, charitable giving, home improvements, education, starting a business, or simply enjoying more of the life you worked so hard to build.

Why the Two-Part Strategy Can Work Emotionally

The power of the Confidence Foundation™ and Freedom Fund™ is not only financial. It’s emotional.

When the basics are protected, retirees may feel more comfortable leaving growth assets invested. They may be less likely to panic during market declines. They may also feel more confident spending on the things that bring joy and meaning to retirement.

This structure creates clarity. One part of the plan is designed for security. The other is designed for growth, flexibility, and possibility. This separation can reduce the feeling that every dollar must perform perfectly at all times.

Confidence Changes Behavior

When every dollar in your portfolio has to perform perfectly just to pay the electric bill, every market headline feels personal. But when your Confidence Foundation™ covers your essential lifestyle, something shifts. Fear begins to loosen its grip. You make calmer decisions. You stay invested more consistently. You become more comfortable spending. You stop treating every market decline as an emergency.

Most importantly, you may begin to experience retirement as a life to be lived rather than a financial problem to be managed. The goal is not simply to maximize returns. The goal is to maximize confidence.

At Her Retirement, we believe retirement planning is about far more than spreadsheets, rates of return, and investment performance.

We help women make informed financial decisions so they can retire with confidence and create a life of meaning. Because the best retirement plan is not necessarily the one with the highest projected return. It’s the one that helps you feel secure enough to live the life you planned for.

If you’d like some guidance on creating a life (and a retirement) with confidence and freedom, reach oout. We can help you Get Her Done.

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The Myth of the “Magic Number” in Retirement Planning

For years, Americans have been told they need to save a “magic number” to enjoy a comfortable retirement. Recent surveys by firms like Northwestern Mutual and Charles Schwab have pegged this figure between $1.5 million and $1.8 million, but experts argue that such benchmarks are oversimplified and misleading.

Lynn Toomey, founder of Retirement Solved and Her Retirement, emphasizes the importance of personalizing retirement planning instead of chasing arbitrary figures. “Retirement isn’t one-size-fits-all. The number you need depends entirely on your unique lifestyle, goals, and income sources,” Toomey explains.

Survey Findings vs. Reality

A Northwestern Mutual survey earlier this year found that Americans believe they need $1.46 million for retirement, a 15% increase from 2023. Similarly, Schwab survey respondents cited $1.8 million as their target. While these numbers grab headlines, they fail to account for individual circumstances, and in fact can work against those struggling to catch up to these numbers.

A 2023 study by Transamerica Center for Retirement Studies adds further context to the discussion on retirement “magic numbers.” According to their findings, the median amount that U.S. workers believe they need to save for a comfortable retirement is $500,000. However, their actual median savings often fall far short, highlighting a gap between aspiration and reality.

This data underscores the disparity in savings goals and the challenges many face in reaching them. For example:

  • Workers in their 20s estimate they’ll need $250,000, while those in their 60s target $1 million or more.
  • 40% of respondents admitted they based their retirement goal on a “guess” rather than a calculated plan.

Real Life Numbers

A sampling of real-life examples highlights the wide range of what people believe their “magic number” for retirement is:

  • Sarah, a 60-year-old teacher, says, “I’ve always thought $1 million was the golden number. But with inflation, I’m worried that might not be enough.”
  • Mark, a 55-year-old engineer, believes, “With $2 million, I’ll feel secure enough to travel and maintain my current lifestyle.”
  • Lisa, a 62-year-old nurse, notes, “My goal is $750,000, combined with Social Security. I’ve paid off my mortgage, so my expenses are lower.”
  • Tom, a 65-year-old small business owner, says, “I’ve saved $500,000 and rely on my pension and Social Security. That’s enough for my modest lifestyle.”
  • Karen, a 58-year-old graphic designer, admits, “I don’t have a number in mind. I just save as much as I can and hope for the best.”

These examples illustrate that people’s perceptions of their “magic number” vary widely based on their financial literacy, lifestyle expectations, and planning. As Lynn Toomey points out, “A single number doesn’t work for everyone. In addition, most people don’t understand cash flow in retirement and have a really poor sense of how much income they’ll have access to and how much they can generate. And as far as expenses, many people have no idea how much their “real” expenses will be in retirement. Effective retirement planning means understanding your unique needs and crafting a strategy tailored to your goals and resources.”

It’s Not About the Number

David Blanchett, head of retirement research at PGIM, argues that the fixation on a magic number is more about generating buzz than providing actionable advice. “Retirement success depends on factors like age, lifestyle, and guaranteed income sources—not on hitting $1 million or $2 million,” he says.

Toomey concurs, adding, “For some, $500,000 may suffice when combined with Social Security or a pension, while others with $5 million may still struggle due to high spending habits. The key is understanding your personal needs.”

A Practical Approach

Experts stress that retirement planning should begin with assessing guaranteed income sources like Social Security and pensions. The next step is determining how much savings will be needed to supplement this income.

Toomey recommends working with retirement specialists: “Don’t settle for a generalist advisor. Seek out someone who focuses exclusively on retirement planning. They’ll help you create a strategy tailored to your needs, not based on arbitrary benchmarks. Note: I can hook you up with a retirement specialist.”

Flexibility Is Key

Ultimately, retirement isn’t about achieving a single savings goal but about creating a plan that aligns with your life. Toomey advises, “Think of retirement as a journey, not a destination. Whether you plan to live modestly or lavishly, start by understanding your life goals, your numbers and then making informed decisions. The ‘magic’ lies in preparation, awareness and adaptability, not in the number itself.”

By moving beyond the hype of the magic number, retirees can focus on what truly matters: financial security and a fulfilling lifestyle. Reach out when you’re ready to get clarity on your real cash flow needs in retirement.

mimiandmom

Holy Sh$t, I’ve Become My Mom

My mom retired a little early from teaching when she was 59. I never thought I’d catch up to her. And here I am. I’m not retiring, however, but in so many ways, I’ve become my mom.

When I reflect on her choice to retire, I see how wise it was. My mom didn’t retire because she had to; she retired because she could. Having a pension provided her with the financial freedom to stop trading time for money. It was this foundation that let her live out her other passions—spending time with family and friends, traveling, watching her grandkids play sports and finally having time for herself. She traded time for joy, rather than just for a paycheck.

Today, traditional pensions are rare, but that doesn’t mean achieving financial security and freedom in retirement is out of reach. While fewer of us have employer pensions, we can build our own “personal pension.” With the right planning, guaranteed income sources, and protection strategies, we can create a retirement that not only funds our needs but frees us to do the things that light us up inside. It’s what I call a plan to be HappiHER, HealthiHER, and WealthiHER.

A significant body of research shows that people with a source of guaranteed income, like a pension or annuity, are happier in retirement. They also tend to live longer. The Journal of Financial Planning found that retirees with consistent income streams have lower rates of depression and stress, and the Institute for Social Research discovered that this financial security is linked to higher satisfaction, well-being, and even physical health. Simply put, the confidence of guaranteed income frees people to embrace life more fully.

Studies also show that retirees with guaranteed income are not only happier but also tend to live longer. Research from the Journal of Financial Planning found that retirees with consistent income streams, like a pension or annuity, experience a higher quality of life and have significantly lower rates of depression and stress. This stability in income is linked to improved mental and physical health, which can add years to their lives. Another study from the Institute for Social Research at the University of Michigan revealed that retirees with guaranteed income report higher life satisfaction and overall well-being, emphasizing the powerful connection between financial security, happiness, and longevity.

One of the strategies used for generating a guaranteed income for life and/or protecting your nest egg from things like volatility and sequence of return risk is annuities. I put together a new guide, Her Guide to Annuities. It’s designed to educate women all about annuities, the various types, provide a case study and some checklists to help women make more informed decisions. You can check it out at: Her Guide to Annuities – Her Retirement

As I look toward the years ahead, I think about what I want for myself and what I want my retirement to look like. Like my mom, I want the freedom to focus on what makes me happiest. And it’s not just about financial health—it’s also about being healthy enough to enjoy life to the fullest.

Are you ready to redefine what it means to be a woman closing in on those traditional retirement years? I’m here to tell you that age is no barrier to becoming the best version of yourself.

I’m 59, living in a small town next to a lake and a mountain where I can kayak, paddleboard, ski, hike, and enjoy the benefits of outdoor life. People often tell me I look 10-15 years younger than my age. How? I’ve mastered the art of physical fitness, and my body has changed little over 30 years.

But it wasn’t always smooth sailing. As I near 60, I’ve had to face down stereotypes about aging. I’ve noticed changes in my body and had to adjust my approach to fitness, health, and energy.

Sound familiar?

Here’s the truth: approaching 60 isn’t a negative experience. It’s an opportunity to embrace the beauty of aging, acknowledge the stories etched in every line, and assert that age doesn’t diminish your relevance, vitality, or style.

I’m on a mission to help women like you overcome challenges, unlock your full potential, and lead a life of fulfillment. Whether it’s about fitness, financial health, or finding your confidence, I’m here to guide you.

If you’re ready to start your journey, I’m putting together the finishing touches on my RetireTogether membership community and a 12-week Retirement Readiness Collaboration which will kick off in January. Let’s begin this conversation and collaboration together!

Reach out to me at: lynnt@herretirement.com to start your journey. Let’s Get Her Done.

 

Her Guide to Annuities: Her Guide to Annuities – Her Retirement

Why Simply Saving for Retirement Isn’t Enough? Part 1

The other day I was having lunch with a friend and we were talking about retirement and the services that Her Retirement provides. She mentioned that she’s been very good about saving money in her 401(k) and said, “I’m all set for retirement.”

This comment made me realize that the average person might also believe the same thing. Many people think they’ve worked hard for 20, 30, 40 years and they’ve saved quite a little nest egg. Retirement plan done. No need to do anything further, but keep working until you feel ready to retire and give your boss or your business the boot.

Well folks, sorry to break it to you, but this is NOT a retirement plan. It’s certainly a great start and if you have more than 4x your salary saved and your 50 let’s say, you’re in pretty good shape, savings wise. However, when you move from the accumulation phase of life (pre-retirement) and into the de-accumulation phase (retirement), you need a comprehensive plan that includes sophisticated strategies to protect you from all the inherent risks you’ll face in retirement. There’s so many things that can go wrong in retirement. You MUST be prepared. And the best way to be prepared is to be pro-active…either learning about the risks and methods to minimize them, or work with a retirement specialist like Her Retirement to understand the blind spots and then put fortification around your savings so that it lasts throughout retirement.

With the right plan and strategies, you can not only mitigate risks, but you can actually make your savings last even longer in retirement (up to 10 years or more). In our full Retirement Income Projection Analysis, we show you the impact (and importance) of:

  • Re-allocating your portfolio (to include less risk/safe money options, improve your investment return and significantly reduce fees)
  • Reducing your taxes as close to 0 as possible
  • Maximizing your Social Security filing strategy to get the most money from this critical benefit
  • Determining your most tax efficient withdrawal or draw-down strategy

 

In our next few series of posts, we’ll dig a little deeper into what can go wrong in retirement and more reasons why simply saving for retirement is not good enough. Stay tuned.

In the meantime, we welcome you to learn more and take one of our new e-classes; try our QuickStart Income Calculator/Report, request a complimentary “Am I Ready” assessment or any of our other free or fee-based assessments.

How Much Annual Income Can Your Retirement Portfolio Provide?

Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or the principal itself, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

Why is your withdrawal rate important?

Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last.

Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Individuals who reached age 65 in 1950 could anticipate living an average of 14 years more, to age 79; now a 65-year-old might expect to live for roughly an additional 19 years. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you’ll need to think carefully about how to structure your portfolio and your retirement plan to provide an appropriate withdrawal rate, especially in the early years of retirement.

Current Life Expectancy Estimates
MenWomen
At birth76.381.2
At age 6583.085.6

Source: NCHS Data Brief, Number 267, December 2016

Conventional wisdom

So what withdrawal rate should you expect from your retirement savings? The answer: it all depends. The seminal study on withdrawal rates for tax-deferred retirement accounts (William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994) looked at the annual performance of hypothetical portfolios that are continually rebalanced to achieve a 50-50 mix of large-cap (S&P 500 Index) common stocks and intermediate-term Treasury notes. The study took into account the potential impact of major financial events such as the early Depression years, the stock decline of 1937-1941, and the 1973-1974 recession. It found that a withdrawal rate of slightly more than 4% would have provided inflation-adjusted income for at least 30 years.

Other later studies have shown that broader portfolio diversification, rebalancing strategies, variable inflation rate assumptions, and being willing to accept greater uncertainty about your annual income and how long your retirement nest egg will be able to provide an income also can have a significant impact on initial withdrawal rates. For example, if you’re unwilling to accept a 25% chance that your chosen strategy will be successful, your sustainable initial withdrawal rate may need to be lower than you’d prefer to increase your odds of getting the results you desire. Conversely, a higher withdrawal rate might mean greater uncertainty about whether you risk running out of money. However, don’t forget that studies of withdrawal rates are based on historical data about the performance of various types of investments in the past. Given market performance in recent years, many experts are suggesting being more conservative in estimating future returns.

Past results don’t guarantee future performance. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

Inflation is a major consideration

To better understand why suggested initial withdrawal rates aren’t higher, it’s essential to think about how inflation can affect your retirement income. Here’s a hypothetical illustration; to keep it simple, it does not account for the impact of any taxes. If a $1 million portfolio is invested in an account that yields 5%, it provides $50,000 of annual income. But if annual inflation pushes prices up by 3%, more income–$51,500–would be needed next year to preserve purchasing power. Since the account provides only $50,000 income, an additional $1,500 must be withdrawn from the principal to meet expenses. That principal reduction, in turn, reduces the portfolio’s ability to produce income the following year. In a straight linear model, principal reductions accelerate, ultimately resulting in a zero portfolio balance after 25 to 27 years, depending on the timing of the withdrawals.

Volatility and portfolio longevity

When setting an initial withdrawal rate, it’s important to take a portfolio’s ups and downs into account–and the need for a relatively predictable income stream in retirement isn’t the only reason. According to several studies done in the late 1990s and updated in 2011 by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, the more dramatic a portfolio’s fluctuations, the greater the odds that the portfolio might not last as long as needed. If it becomes necessary during market downturns to sell some securities in order to continue to meet a fixed withdrawal rate, selling at an inopportune time could affect a portfolio’s ability to generate future income.

Making your portfolio either more aggressive or more conservative will affect its lifespan. A more aggressive portfolio may produce higher returns but might also be subject to a higher degree of loss. A more conservative portfolio might produce steadier returns at a lower rate, but could lose purchasing power to inflation.

Calculating an appropriate withdrawal rate

Your withdrawal rate needs to take into account many factors, including (but not limited to) your asset allocation, projected inflation rate, expected rate of return, annual income targets, investment horizon, and comfort with uncertainty. The higher your withdrawal rate, the more you’ll have to consider whether it is sustainable over the long term.

Ultimately, however, there is no standard rule of thumb; every individual has unique retirement goals, means, and circumstances that come into play.

More ways to help stretch your savings

  • Don’t overspend early in your retirement
  • Plan IRA distributions so you can preserve tax-deferred growth as long as possible
  • Postpone taking Social Security benefits to increase payments
  • Adjust your asset allocation
  • Adjust your annual budget during years when returns are low

Tax considerations

Prolonging your savings may require attention to tax issues. For example, how will higher withdrawal rates affect your tax bracket? And does your withdrawal rate take into account whether you will owe taxes on that money?

Also, if you must sell investments to maintain a uniform withdrawal rate, consider the order in which you sell them. Minimizing the long-term tax consequences of withdrawals or the sale of securities could also help your portfolio last longer.

Her Retirement affiliates are available to provide complimentary 1-on-1 workshops to review your situation and to provide help in determining how much income your portfolio will provide. He/she can also complete a full Retirement Income Projection Analysis (RIPA) to give you some further insight into how long your current nest egg will last.

When Is 6% Versus 7% a Better Rate of Return???

When utilizing proper Gamma retirement planning strategies an investor can experience significant positive effect when taking income from their retirement portfolio.  Most advisors today don’t employ a Gamma-Optimized strategy

“When it comes to generating retirement income, investors arguably spend most time and effort on selecting ‘good’ investment fund/managers – the so called Alpha decision – as well as the asset allocation, or Beta decision. However, Alpha and Beta are just two elements of a myriad of important financial planning decisions for the average investor, many of which can have a far more significant impact on retirement income.”  -David Blanchette, CFA, CFP , Head of Retirement Research at Morningstar Investment Management and Paul Kaplan , Ph.D., CFA, director of research for Morningstar Canada

A research report written by David Blanchette, CFA, CFP, head of retirement research at Morningstar Investment Management and Paul Kaplan , Ph.D., CFA, director of research for Morningstar Canada entitled;  Alpha, Beta, and Now …Gamma, explains that most retirees and their advisors are still focused on Alpha and Beta planning strategies which focus solely on investment management decisions when developing a retirement income plan. Both Alpha and Beta are statistical portfolio measurements. Alpha (negative or positive) measures manager effect within the portfolio, while Beta measures the risk or volatility of an investment portfolio versus a representative benchmark. Their research and paper concluded that utilizing a new statistical measurement they call Gamma (the effect that different retirement planning variables have on a retirement income plan) can now be confidently utilized for retirement income planning. As they explain, “We estimate a retiree can expect to generate 22.6% more in certainty equivalent income utilizing a Gamma-Efficient retirement income strategy when compared to our base scenario (traditional investment strategy only: Alpha/Beta planning). This addition in certainty-equivalent income has the same impact on expected utility as an annual arithmetic return increase of 1.59%”.

This is certainly an eye opening conclusion to an extremely thorough and riveting research report on Retirement Income Planning that absolutely validates why Her Retirement’s pragmatic and research based approach to retirement income planning works so well. The difference is that Her Retirement has looked at the  research of Blanchette, Kaplan, Finke, Phau, and Milevsky, as well as many others over the years, and developed a pragmatic approach that incorporates many of the same principles and strategies for maximizing a retirees’ retirement outcome.

Volatility and Sequence of Return Risk Must Be Part of the Equation

As a quick reference, recent research has indicated that when a retiree begins to take income from their portfolio it’s imperative to reduce volatility in the portfolio in order to increase the portfolio’s survival rate. The evidence concludes that for any stated rate of return, the portfolio with the lowest volatility will survive the longest when taking income from the portfolio. On the converse, the portfolio with the highest volatility will suffer portfolio failure the quickest.  With this knowledge, we constructed a portfolio to statistically reduce risk, to the greatest extent possible, while offering the highest return for that risk. Our recommendation was to utilize a moderate portfolio consisting of 50% diversified stocks and a 50% position in Equity Index Annuities (EIAs) linked to various globally diversified indexes.

In addition, a major risk that must be calculated to assess its effect on a retirement projection is Sequence of Return Risk. This is the risk that a portfolio will suffer major losses in the early years of retirement. This event would be known as “negative” Sequence of Return Risk and would have a negative effect on the survival rate of the portfolio (i.e. the portfolio would have a much shorter lifespan and a retiree would run out of money far sooner). On the converse, there is “positive” Sequence of Return Risk where the portfolio has tremendous upside growth in the early years or retirement. In a positive sequence of return environment a retirement portfolio would experience much greater potential portfolio survival (i.e. the portfolio would last much longer while taking income from the portfolio).

An “average” Sequence of Return Risk is a market environment where there is average or lower overall volatility in the portfolio which would give the portfolio moderate survival ability while taking income from the portfolio.

In summary, depending on the market environment (negative, positive or average) what the retiree experiences early in their income phase will have a direct effect on the portfolio survival rate…even with identical portfolio returns over the long term.  A retirement income projection analysis must calculate the effect Sequence of Return Risk has on the long term survivability of a retirement portfolio. This will assure the highest probability of portfolio survival based upon the income strategy employed.

Based upon the below retirement projection, one can see how the practical application and effect  of a Gamma-Efficient retirement income strategy can have greater impact on income when compared to a traditional Alpha Beta strategy that is employed by most retirees and advisors today.  In this recently completed retirement projection for a new client we found the following:

After projecting the client’s traditional Alpha Beta retirement strategy (the “before” scenario), we reallocated the client’s current 80% diversified stock and 20% diversified bond portfolio to a more conservative allocation that would offer less return, but would dramatically reduce the portfolio’s volatility, while also offering reasonable growth potential.  The client’s retirement projection variable was reset to the “new” reallocated portfolio and the results of the “before and after” are quite compelling.

The Results Speak for Themselves

The retirement projection assumptions utilized for this analysis were as follows:

Rate of Return Estimates –
Global Stock Portfolio @ 8% net
Global Bond Portfolio @ 3% net
Equity Index Annuity @ 4% net

Current Portfolio at 80% global stocks and 20% bonds = 7% melded return estimate (net)
Proposed Portfolio at 50% global stocks and 50% EIAs = 6% melded return estimate (net)

Additional Assumptions –

The client is currently 53 years old and preparing to retire at age 62 with a net retirement income need of $5,000 per month. We inflated her income needs at a 3% adjustment per year beginning immediately in the projection.  Her current portfolio is valued at $450,107. She also has a small pension that will begin at age 65 paying her $11,124 annually. As well, the client will begin taking Social Security income at age 62 in the amount of $2,473 per month with a 2% cost of living pay increase per year. The client also has $25,000 per year rental income. We increased the rental property income at 1% cost of living adjustment. The analysis will also assume a marginal tax rate of 17%.

All these assumptions and variables were entered into our Retirement Income Projection Analysis (RIPA) system and here are the results:

The Results – Results presented on both a negative and average Sequence of Return environment

Negative Sequence:
Current Scenario – Age 90 Client Runs Out of Money
Proposed Scenario – Age 90 Client has $818,887

Average Sequence:
Current Scenario – Age 95 Client has $1,355,620
Proposed Scenario – Age 95 Client has $1,625,598

As we see by the above results, it’s imperative to develop a strategy that will utilize risk reducing investment vehicles to assure an income portfolio’s survival over the long term. Traditional stock and bond growth strategies employed by most are not enough. A Gamma-Efficient portfolio strategy must be utilized to assure the highest probability of portfolio survival.

Why 6% is better than 7%?

A new paradigm needs a new strategy:  growth vs. income planning; Alpha Beta planning vs. Alpha Beta and Gamma strategies to generate a better retirement outcome.

As Blanchette & Kaplan explain, “Alpha and Beta are at the heart of traditional performance analysis; however, as we demonstrate, they are just one of the many important financial planning decisions, such as savings and withdrawal strategies, that can have a substantial impact on the retirement outcome for an investor.”

The above “current vs. proposed” is a very real and very typical scenario with many retirees. In most, if not all cases, the results will be the same… math is math and there’s really not much debate in how numbers calculate. This is an important and valuable outcome scenario where a combined stock and equity index annuity portfolio (generating a 6% return) is clearly better than a stock and bond portfolio (with a 7% return).

We have witnessed clients that are “annuity phobic” due to all the media’s misinformation and hype, as well as the all stock proponents who wrongfully claim that all annuities are too expensive.  We’ve also witnessed clients that are “stock phobic” due to more rhetoric about how one can lose all their money in the stock market and stocks are no place for retirees to invest due to the risk. We purport that the best approach is a combination approach (based on research and factual numbers, not hearsay).

We also suggest several additional Gamma strategies/products to further increase the portfolio’s life expectancy:

Single Premium Immediate Annuities (SPIAs)
Dynamic Withdrawal vs. Traditional Static Withdrawal
Sound Social Security planning with sophisticated Social Security timing software

At Her Retirement we focus on the same five important financial planning decisions/techniques as suggested by Blanchette & Kaplan’s Alpha, Beta and now…Gamma research:

1) A total wealth framework to determine the optimal asset allocation
2) A dynamic withdrawal strategy
3) Guaranteed income products (i.e., annuities)
4) Tax efficient allocation decisions
5) Portfolio optimization that includes a proxy for the investor’s implicit and/or explicit liabilities

“We believe retirees deserve an investment and income planning experience that is founded on long-term, research and evidence-based results NOT rhetoric.  And we’re committed to providing this for them.” -Her Retirement