BY

HOLLY CARROCCIO, CFP®

NEXUS ADVISORS, L.L.C.972-348-6311

holly@nexusadvisorsllc.com

Retirement Distribution Challenges:

Live on Less, Help Make It Last

Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC., Member SIPC.

Supervisory Office: 10000 North Central Expressway, Suite 1200, Dallas, Texas 75231-2363 (972) 348-6300.Nexus Advisors LLC is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies.

 

Challenge #1: Living too Long

63% chance that one spouse of a couple who are both age 65 will live to age 90

Close to 40% chance of one spouse living to age 95

Difficult to budget and invest when planning for a 25 to 30 year retirement horizon

Source: Annuity 2000 Mortality Table, Society of Actuaries

Solution #1: Develop a Spending Rule

Develop a rate of withdrawal from savings that is sustainable over long time periods

Rate of Withdrawal

100% Bonds

75% Bonds/25% Stocks

50% Bonds/50% Stocks

25% Bonds/75% Stocks

100% Stocks

4% 87% 98% 96% 93% 90%

5% 38% 75% 82% 81% 79%

6% 5% 31% 56% 64% 65%

7% 0% 6% 30% 45% 51%

8% 0% 0% 13% 29% 39%Source: Morningstar, Inc. 3/1/2011

Challenge #2: Should I move to bonds or cash?

“Next time the market starts down, I’m going to get out and move to bonds and cash.”

Most people feel they can abandon their allocation temporarily during market downturns

Average equity returns from 1991 to 2010: 9.14%

Average equity investor returns during same period: 3.83%

Source: Debar Study 12/31/2010

Recency bias: What just happened will keep happening

Action bias: Desire to take action under stress

Some downturns are short term corrections, not economic reversals, how do you tell the difference? 3% Pullback every 90 Days 90% of these will be between 3 – 10% Steepest = 15.99%

Source: Morningstar

Challenge #2: Should I move to bonds or cash?

Solution #2: Don’t Discount History & Diversification

Over 58 years since 1951, the S & P 500 delivered negative returns 14 of those years.

50/50 portfolio lost 11 of 58 years

2008: A perfect storm, S&P* down 37%, worst since 1951

50/50 portfolio, down 16.9% in 2008, only time since 1951 down more than 10% loss

In every 12 month period following a “bottom”, the market soars

70% of the returns are earned in 50% of the time

Sources: Morningstar *Indices are not available for direct investment.

There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk.

S & P Rallies after recessions: 1951 to 2003

Recession Period

Market Bottom

Gain in First 12 Months

July 1953 – May 1954

August 1953 35.0%

Apr 1960 – Feb 1961

Oct 1960 32.6%

Dec 1969 – Nov 1970

Jun 1970 41.9%

Nov. 1973 – Mar 1975

Dec 1974 37.2%

Jul 1981 – Nov 1982

Jul 1982 59.4%

Jul 1990 – Mar 1991

Oct 1990 33.5%

Mar 2001 – Nov 2001

Feb 2003 38.5%

Challenge #3: Inflation

Why not just invest in all bonds to start with?

Assume the unrealistic assumption that inflation will remain 3.16% as it has for 30 years, through 12/31/2010.

Costs of living are 40% higher in 10 years, and have more than doubled in 20 years.

If using all bonds to manage risk, no increases to income

If average returns on bonds and CDs are 5%, for example, you would have to adjust the withdrawal rate down from 4% to 1.84%

Source: Bureau of Labor Statistics, September 2011

Solution #3: Inflation Busters

Stocks returns have on average outpaced fixed income investments over long periods of time.

Keep 25% to 50% of the portfolio in “growth” mode

Investing in specific sectors may experience greater short-term price volatility than a more diversified. They are more suitable for use in an aggressive component of an investment program.

Challenge #4: “I spend more than a 4% withdrawal will cover”

Most people spend more than they make, retirees are no exception

We like to avoid knowing where our money goes

Solution #4: Consider various spending strategies

Consider multiple portfolio buckets

Toggle income: During downturns, spend money from bonds not stocks Rebalances portfolio back toward stocks Avoid locking in stock losses

Carefully review spending: Need vs. discretionary

Spending could be phased: Woo Hoo! Early retirement: The 1 – 2 years

after Normalizing: 8-15 years: travel, hobbies, etc. Late retirement: Medical, aging issues

Use alternative sources of income: Real Estate, fixed annuities

Challenge #5: Taxes are likely to go up

Solution #5: Tax diversification

Municipals

Roth (conversions)

Life Insurance Cash Values

Non-qualified investments

Annuitization (non-qualified)Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid in the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans &/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy terminates before the death of the insured.

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Nexus Advisors, LLC, its employees or representatives are not authorized to give legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel.