Once we’ve established an income plan, after we assess your current needs and build a plan that’s going to address income planning in your retirement, we begin to create an investment strategy for the remaining assets. We set aside “X” amount of dollars for the income.

Annuities are great tools to use for putting money in and taking an income that you cannot outlive—you buy cash flow with an annuity. So, if you purchase an annuity and you say, out of that $5,000 budget that you had needs for $3,000 of it being covered by Social Security, maybe you have a million dollars that you had accumulated during your accumulation years, and you take say $500,000 of that and you put it into an annuity, then that annuity gives you that $2,000 a month income, but it’s like a pension-style income. If a joint payout option is selected, that income goes for the rest of the husband and wife’s life until they’re both gone. Now most annuities will work fairly the same. You have 2 major types: Immediate Annuities and Deferred Annuities. In an immediate annuity, you dump a lump sum in and monthly income begins immediately. With deferred annuities, you have variable, fixed, and fixed-indexed. Having the right annuity in place is really key. Having the wrong annuity, that’s like having something in your shoe, every time you take a step, it hurts. One of the worst investments you can make, is buying the wrong annuity.

Annuities themselves are not bad products. People make bad annuity purchases because they purchased them with the wrong intentions, or they purchased them with the right intentions but they bought the wrong product. Having the right type of annuity in place, is like having a cold glass of water on a hot day; it can be very life-giving.

Let’s say we put $500,000.00 in an annuity that guarantees that income shortfall. Now we’ve got Social Security and guaranteed insurance contracts paying us the full $5,000 a month needed in the budget. Then, what do we do with the remaining, say $500,000.00 out of your million dollar nest egg—we invest it into various types of investments in the markets.

While doing that, first thing is to assess your risk tolerance or your risk capacity. Maybe your risk tolerance has changed a little bit over the years. It should have. For instance, in 2008, if people in their late 40s early 50s, experienced a 30-35% loss in their portfolios, they just kept putting money into their portfolios, and when the market came back, they made all the money up that they lost. In 2005 to 2007, folks started pulling money out of their portfolios, and what happened—the market crashed. The next thing you know, in 2012-13, some of these people were out of money.

There’s a concept called “Dollar Cost Averaging” that people use while they’re working. Dollar Cost Averaging is taking a set amount of money and investing it each month. Let’s say its $1,000, so in a 12-month period of time, you invest $12,000 ($1,000 a month). Basically, you put that in your 401K so that you’re buying when the market’s low, and when it’s high and in between, that’s dollar cost averaging. At the end of the year you’ve bought all these different inflection points, hopefully at the end of the year you have more money in savings than the $12,000.00, because you bought in at all these different price points. The average price of the shares that you bought should be lower than if you just drop it all into the market on one single day. Dollar Cost Averaging can really accentuate the gains that you experienced during your accumulation years.

Now, Reverse Dollar Cost averaging is a term that not many people are familiar with. Reverse Dollar Cost Averaging is just like it sounds; you’re doing the opposite of what you did when you were growing your portfolio. Reverse Dollar Cost Averaging is taking money out of a portfolio that is rising and falling based on market performance.

The chart below illustrates a portfolio that is growing based on the S&P 500 with no withdrawals. The left side shows the gains and losses in order and the right side show the gains and losses inversed. At the end of the eleven years the results were the same dollar amounts.

When someone is taking money out of a portfolio and you have two or three years of loss like we did in the early 2000s and in 2008, we call this “sequence of return risk.” When you pull money out of this portfolio and the portfolio experiences losses in the same year, this accentuates the loss and can lead to what’s called retirement depletion. If you have two to three bad years in the stock market, it can accentuate losses so fast that you could see a million dollar portfolio taking $40,000 to $50,000 out per year (that’s a 4% to 5% withdrawal) could cause substantial losses over time.

In the example on the next page shows what happens if you retired in the year 2000 and started withdrawing 4% with inflation adjustment and experienced the sequence of return risk you can see how fast a portfolio can diminish.

The next thing we do is look at the portfolio and see how much is being paid in fees to the current advisor. So many 401Ks, mutual funds, and variable annuities have huge fees inside of them. And fees in my opinion, fall in really one of three categories. Fees can agitate losses, diminish returns and they can be good or bad.

“Joe,” you say, “Fees can be good.” Yes, absolutely. You wouldn’t want a guy to sit and manage your money that’s not getting paid. When someone tells you they’re going to do it for free—watch out. “There is no such thing as a free lunch.” People don’t work for free. We charge our clients a reasonable fee that’s competitive. I’ve got kids to feed and I donate my time to charity as well as committing to various activities at my church. But, my work, I take serious, and I charge fees. Fees can be a good thing and a good advisor will charge you a good competitive fee.

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