My 5-Minute Retirement Plan

By Brian Skrobonja

The most common mistake people make when planning their retirement is assuming that the way wealth was created is the same way they should hold wealth in retirement, with the added twist of being more conservative.

Popular belief suggests that as you age, the level of risk an investor takes should decline in an effort to preserve their assets and protect them from market loss. The general idea here is the younger you are, the more aggressive you should be. The older you are, the more conservative you should be.

The theory is that too much risk can lead to losses if markets fall with less time to recover.

If you take on too much risk, you run the risk of losing money. If you don’t take on enough risk, then you run the risk of running out of money. Most people struggle to find a balance, especially in a low-interest-rate environment like we are in now.

The Problems with Investing for Income

One approach is often used to simply keep the risk moderately high with the belief that profits can be skimmed from the portfolio in a way that aims to protect the principal while allowing the portfolio to grow over the long term.

If you think bonds are the answer, think again. With interest rates on the rise, there is a high probability of losing principal or having bond yields running below inflation rates. Finding a fixed-income alternative is a serious challenge.

What about the 4 Percent Rule?

The theory is that based on past performance if you withdraw 4 percent from your accounts then you “should” statistically carry those assets for 30 years.

This brings up another issue beyond just the potential for market losses and that is the effects of inflation. Inflation is the silent killer of all retirement plans by gradually reducing the purchasing power of your assets over time.

The case against Dividend-Paying Stocks in Retirement

To shed some light on this problem, consider the annualized return of your portfolio must have to fulfill the need of a 4 percent distribution, a 3 percent inflation rate, and fees around 1 percent. The math concludes that the break-even is 8 percent year over year without consideration for down years or volatility.

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