Shifting from asset accumulation to retirement distribution

Shifting from asset accumulation to retirement distribution

By Mark Ahlers, Hills Bank, Linn County LIVING WELL Magazine

For retirement planning, instead of thinking about asset accumulation, develop a “Liability Driven Investing” strategy for your assets to provide cash flow.

In this strategy, the “liability” is the amount of annual living expenses not covered by social security or income sources such as rental income. When divided by the size of the investment portfolio, you get the rate of return needed to match your annual living expenses. For example, if your annual living expenses are $70,000 and you receive $30,000 annually in social security, then a $1 million portfolio of investable assets must return 4% per year to match your annual need. If you are 65+, you must also allow for inflation and understand the probability of success in meeting your target need over an expected retirement of 25+ years.

It is not enough to rely on historic returns analysis. A decade ago, the casual observation was that stocks return 10% per year and bonds 6%. Clearly, that has not been the experience recently.

A more professional approach is to incorporate Capital Market Projections (CMP) into the analysis. CMP is a forward looking evaluation of the current economic environment, providing both a return and a risk forecast for each asset class utilized in an investment portfolio. The CMP is tested against history for reasonableness, but is grounded on present circumstances. In addition to a simple forecast of probable outcomes, the CMP will attach a range of expected outcomes that are both better and worse than the forecasted median return for a given mix of assets. If it appears that the liability cannot be met while still maintaining an appropriate risk profile, then living expenses should be adjusted, or retirement should be deferred.

Good, prudent investing is driven by process. The process of incorporating CMP into retirement planning helps test whether the goal or “liability” can be met with reasonable probability of success. Including CMP into your portfolio balances risk. This should be supplemented by a personalized investment policy, implementation of that policy and, finally, by monitoring of results.

Learn more about retirement distribution at hillsbankwealthmanagement.com or call 1-800-899-8858.