Proprietary Concepts

The Retirement Shock Absorber®

Most of our clients are in or near retirement. Often their biggest concern is being able to maintain their financial independence at their current standard of living without running out of money. We acknowledge that we cannot control, or consistently predict, the inevitable short-term ups and downs in the markets, so we developed a proprietary methodology called The Retirement Shock Absorber® to address this concern. Applying this strategy as part of a client’s comprehensive financial plan helps the plan absorb portfolio fluctuations. The Retirement Shock Absorber® methodology is illustrated and explained below.

The red line represents the minimum amount of capital required by a hypothetical client in order to maintain their lifestyle through retirement. The yellow line represents the hypothetical client’s investment portfolio and is a dramatization of the potential fluctuation in the markets. During a market decline, the graph illustrates how the value of the client’s investment portfolio can fall below the capital needed to meet their retirement income needs. It is at a time like this that investors can fall victim to their emotions and make decisions that potentially prove to have long-term negative ramifications on a portfolio.

Hypothetical Portfolio without The Retirement Shock Absorber®

without-retirement-shock-absorber

Hypothetical Portfolio with The Retirement Shock Absorber®

In this second chart, the blue line represents a plan with a 20% cushion built-in, or Retirement Shock Absorber®. During a market decline, a portfolio with The Retirement Shock Absorber® is less likely to fall below the amount of capital needed to sustain the client’s standard of living. With The Retirement Shock Absorber® in place, we are able to prove to clients that they have enough money. It helps prevent them from making rash decisions because they can feel secure in this knowledge.

with-retirement-shock-absorber

retirement-shock-absorber-blue-line Retirement Shock Absorber Red Line Retirement Shock Absorber Yellow Line

Portfolio with a 20%
Retirement Shock Absorber®

 Minimum capital required
to maintain lifestyle.		 Representation of
market fluctuations.

 

 

The Lifestyle Stress Test™

Withdrawal rate is a measurement we use to evaluate whether a client’s portfolio distribution needs are sustainable over a long timeframe such as retirement.  It is calculated by dividing total annual withdrawals by the value of the portfolio.  A portfolio with a lower withdrawal rate is more sustainable than one with a higher withdrawal rate. 

For example:  Assume an average annual growth rate of 8% for a portfolio.  Then, subtract 3% to account for the average annual inflation rate that erodes the purchasing power of the portfolio.  Theoretically, this leaves 4% - 5% which can be used to fund distribution needs.  Withdrawal rates of 5% or greater may begin to erode principal and cause depletion of the account.  Hence, the financial planning community commonly considers a 4% or lower withdrawal rate to be sustainable.  We utilize the chart below to illustrate the concept of withdrawal rate. 

The Lifestyle Stress Test ™

  the-withdrawel-stress-test