Timing is everything


Today, retirement planning/living is not about what you make, it’s what you keep. For decades investment advisers have focused on assembling asset accumulation models for clients, applying theories around historical market returns to help prepare for future uncertainty in the market. They’ve given far less attention to measuring future income needs.  Regardless of the investor’s age, financial organizations and advisers have always frowned upon the idea of timing the markets when accumulating wealth. Economists consider market timing to be a form of gambling based on pure chance and claim that financial prices always exhibit random behavior and thus cannot be predicted with consistency.  History has proven that timing the markets in our wealth accumulation years leads to irrational decisions made without examining causes or facts. Ironically, today we find timing the market in retirement offers a strategy necessary to protect the potential extension of our future income needs.

In previous discussions in this column, we addressed the dynamic shift in retirement planning due to life expectancy risk. Today we will highlight a volatility-based process that shows us how to use a scientific strategy when withdrawing our retirement income, taking advantage of market volatility. In retirement “Timing Is Everything,” the underlying message is we can no longer succumb to fear around market volatility in our 60s and 70s as we prepare for a potential 20- or 30-year retirement.  We must establish two investment vehicles that help us tailor our risk, ultimately allowing us to: withdraw sustainable income streams, avoid eliminating our life savings and keep pace with health care and pharmaceutical inflation.  This method is commonly known as a “volatility buffer” and provides a balance between reacting positively to instability in the market (unknown) while taking advantage of an income source that can be rationally explained and reliably applied (known). 

One resolution must be adopted by the other to prepare for the disproportionate effects of inflation in retirement. Spending habits and expenses become more challenging for retirees when they reach their 70s and 80s due to higher medical care and housing costs and other outlays. To reduce the chance of outliving our money, the key is to establish a process where we are not always taking money from one pool of assets directly tied to the markets.  We must establish the ability to also withdraw income from different assets not openly tied to the short-term fluctuating returns of our qualified retirement plans (401k, 403b, IRA) we spent decades to accumulate. Taking income from one source alone creates significant concerns. Withdrawing  income from an independent pot of money after a year in which your investments may not have earned what you need to pull out for income that year, never gives your pot of money (resources) a break. 

Establishing two income sources offers your savings a “volatility buffer” year, a chance to recover from any losses that occur in a down year within your assets subject to the markets.   Or to take an immediate withdrawal out of these assets after a year of positive gains in the market – a buffer emotionally  leads you off the curves of the market’s instability.  Even more alarming, is when retirees seek comfort by periodically or constantly holding excessively large positions in cash/fixed alternatives, subjecting themselves to inflationary pressure found in, for example, health care and pharmaceutical inflation, at far greater percentages than the yields gained in their cash holdings.

We must accept the fact there is healthy risk and unhealthy risk when protecting our income upon retirement. Timing your withdrawals due to the outcome of the global economy/markets offers a justifiable strategy to undertake a drawn-out retirement. Until next time remember, “The only thing forever is yesterday.”

Andrew S. Miller is a Chartered Retirement Plan Specialist with the College of Financial Planning. Send your questions to  amillerri@gmail.com.