I am retiring and I can’t lose money now

The retirement process is very overwhelming for most individuals and couples. Typically you are transitioning from a steady paycheck to depending on accumulated wealth to provide a “retirement paycheck”. Understanding the complete retirement process is crucial to making a smooth transition from the corporate/self-employed world to a long-lasting, sustainable retirement. The retirement process consists of many steps, each of which is important. A summary of three key steps are as follows:

1. Asset Consolidation: Consolidate your accounts as much as possible, simplify the big picture.
2. Quarterly Account Rebalancing: Maintain portfolio diversification and address cash needs for the retirement paycheck
3. Create Retirement Paycheck: Transfer cash generated from quarterly rebalancing to bank account - your retirement paycheck

One of the big myths about retirement is that you simply put your portfolio in safe investments and “live off the interest”. Typically, pre-retirees are referring to bonds when they make this statement. There are two problems with having just bonds. The first is that there is no potential for growth in your portfolio. Each year your living expenses need to increase with inflation, and bonds will not provide any growth to compensate for this. Secondly, there is interest rate risk. If interest rates rise, your portfolio of bonds could decrease in value. The decrease would be a function of the average maturity of the bonds (longer maturity=larger decrease when interest rates rise) and the magnitude of the rise in interest rates.

Another common myth is, to be safe; you would just buy CD’s in your portfolio. This can work but you actually will need to accumulate 33% more before your retire if you want to use this investment strategy because the safe withdrawal rate for a portfolio of CD’s is 3%. Typically, a diversified portfolio of stock & bond mutual funds (ranging from 40% stock funds and 60% bonds to 80% stock funds & 20% bond funds) will provide a safe withdrawal rate of 4% annually. This amount can be increased each year for inflation. For example, if you have accumulated $2M, you can safely withdraw 4% or $80,000 per year with a diversified investment portfolio. If you only have CD’s and money markets, then you need $2,666,666 to withdraw the same $80,000 annually.

In summary, you do need to take some risk but not a lot. The reason you need to take risk is that you need to have some growth in your portfolio to keep up with the increased living expenses each year. As you move to the extremes on each end, meaning really conservative or really aggressive, you increase the probability of running out of money. As you get more aggressive, a couple of bad years in the beginning can derail your retirement. If you chose an extremely conservative portfolio, then you run the risk of not having your portfolio keep up with inflation.

Finally, if you have a moderate portfolio, you will have time for the portfolio to recover if the market drops. Typically, we plan for 30-year retirements or to age 93. If you have a moderate portfolio, your biggest risk becomes not that the portfolio will go down and not recover, but the fact that you could outlive your money.

The retirement process is extremely complicated and can be very confusing. We encourage you to seek the professional help of a wealth advisor who can engage your other advisors. This will make the process much easier and smoother for you – so you can ultimately enjoy retirement.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.


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