Steer middle path to smooth retirement

I am retiring, and I can’t lose money now.

The retirement process is 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 or self-employed world to a long-lasting, sustainable retirement.

The retirement process consists of many steps, each of which is important:

Asset consolidation: Consolidate your accounts as much as possible to simplify the big picture.

Quarterly account rebalancing: Maintain portfolio diversification and address cash needs for the retirement paycheck.

Create a retirement paycheck: Transfer cash generated from quarterly rebalancing to a bank account.

One of the big myths about retirement is that you simply put your portfolio in safe investments and “live off the interest.” When pre-retirees make this statement, they’re usually referring to bonds.

There are two problems with only having 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. Second, 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 equals larger decrease when interest rates rise) and the magnitude of the rise in interest rates.

Another common myth is that it’s safe to just buy certificates of deposit in your portfolio. This can work, but you will need to accumulate 33 percent more before your retire if you want to use this investment strategy because the safe withdrawal rate for a portfolio of CDs is 3 percent.

Typically, a diversified portfolio of stock and bond mutual funds (ranging from 40 percent stock funds and 60 percent bonds to 80 percent stocks and 20 percent bonds) will provide a safe withdrawal rate of 4 percent annually.

This amount can be increased each year for inflation. For example, if you have accumulated $2 million, you can safely withdraw 4 percent — $80,000 per year — with a diversified investment portfolio. If you only have CDs and money markets, then you need $2,666,666 to withdraw the same $80,000 annually.

In summary, you need to take some risk, but not a lot. You need risk 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 — 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, you run the risk of not having your portfolio keep up with inflation.

If you have a moderate portfolio, you will have time for it to recover if the market drops. Typically, we plan for 30-year retirements, or to age 93. With a moderate portfolio, your biggest risk is not that its value will go down and not recover, but 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 Boulder-based Diversified Asset Management Inc., an investment adviser registered with the Securities and Exchange Commission. Pyle can be reached at 303-440-2906 or rpyle@diversifiedassetmanagement.com.

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