How to put more certainty in your retirement income
Stephen Tuttle

The emotional toll from the stock market crash of 2008 still lingers for many of today’s retirees whose retirement plans were decimated by 40 to 50 percent declines. Although many have seen their retirement portfolios recover, they enter retirement intent on avoiding a similar calamity by reducing their exposure to equities. Conventional planning models confirm that is precisely what retirees should do – to gradually reduce equity exposure as a way to avoid market risk. While that may be considered a prudent approach to retirement investing, going too far can put retirees at risk of outliving their income.

The challenge for retirees in today’s economic and market environment is that the alternative to equities – bonds or cash equivalents – aren’t performing the way they did when those conventional planning models were created. Who could argue with that approach when bonds were yielding 7 to 10 percent, or CDs were yielding 5 to 6 percent? The problem is the yields on these instruments today are just a fraction of what they were a decade or two ago. Investment grade bond yields are still hovering around low single digits and savings rates are more than half that.

The Real Risks of Retirement Income Planning

Considering all of the components of a sound retirement income strategy and the many variables that come into play, planning for the distribution phase of a retirement plan can be far more complex than the accumulation phase. During the accumulation phase, the focus is on maximizing returns. Investing during retirement is more about making your money last. To that extent, market risk should be the least of retirees’ concerns as they face the prospect of living 25 or more years in retirement.

Longevity Risk. The greater risk for retirees is their own longevity compounded by inflation, which reduces their purchasing power over time. Reduced purchasing power increases the need to draw down more assets which can lead to their early depletion.

Sequence Risk. Sequence risk involves the timing of market returns, which can have a significant impact on income distribution over the long term. A steep or sustained market decline in the early years of distribution can have a lasting negative impact. Drawing down assets could require liquidating securities that have lost value, effectively locking in losses. It may be safe to assume an average annual return of 6 to 7 percent over 30 years; however, if the first few years consist of negative returns, the combination of a decline in portfolio value and the drawdown of assets in early years could be too much to overcome.

Investing Too Conservatively. While investing in safe, fixed-income instruments may offer greater peace of mind for the moment, they do very little to keep pace with inflation and preserve purchasing power when it is needed. It is understandable that, when you are no longer working, watching your portfolio shrink during a severe market setback can take an emotional and psychological toll, which can lead to costly behavioral mistakes. However, instead of fearing stock market volatility, retirees should learn to embrace it because it is what generates the level of returns needed to extend income while maintaining purchasing power.

A well-conceived, long-term investment plan that employs an optimal diversification strategy can help retirees overcome the emotional toll volatility can take.

Time Diversification

A sound, long-term investment strategy embraces market diversification to reduce portfolio volatility while seeking positive, long-term returns. That’s fine for accumulating assets. But, when investing for current and future income needs, another layer of diversification is required – time diversification.

A strategy in which you carve out cash today for later purposes uses a disciplined portfolio management strategy that incorporates your time horizon and near-term income need while focusing on the big picture and growing your portfolio. Aligning your time horizon with an investment approach can increase tolerance for growth and risk by maintaining diversified equity allocations. This puts your portfolio in control of the market instead of the market controlling the portfolio.

How a Cash Carve-Out Strategy Works

The strategy compartmentalizes current and future retirement income needs into three different buckets, each with a specific time horizon and an asset allocation designed for a specific objective.

The first bucket, for meeting current income needs, is filled with liquid, low risk instruments, such as cash equivalents, short-term bonds, CDs, and U.S. Treasury Bills.

The second bucket might be invested in intermediate-term bonds and other higher yielding investments with moderate risk with the objective of preserving capital and generating income.

The third bucket is your growth portfolio, allocated among U.S. and foreign stocks for growing your lifetime income value.

While strategies can vary depending on your personal income needs, a typical allocation among the three buckets might be 16% for the short-term bucket, 24% for the intermediate-term bucket, and 60% for the long-term growth bucket.

The portfolio can be managed so that current income needs are funded by the short-term bucket. As long as there are sufficient assets in the short-term bucket, there is no need to sell assets from the longer-term buckets and they can continue to benefit from long-term growth potential. With the average bear market lasting less than 24 months, having four to five years of income set aside for near-term needs should provide a sufficient cushion.

As income is drawn down, the short-term bucket can be replenished by harvesting positive returns in the longer-term buckets. In years when stocks are up, returns are harvested from the long-term bucket and transferred to the short-term bucket. Income from the intermediate-term bucket is also available to replenish the short-term bucket.

There is no greater challenge today than creating sustainable lifetime income. Carving out cash today for use tomorrow seeks to meet short-term needs while seeking the necessary growth to meet longer-term needs.

About Signet Financial Management

Signet Financial Management is a wealth management firm that takes a personal approach in helping high-net worth families, individuals, and business owners navigate the complexities of managing money. We believe in your financial well-being, and custom tailor solutions using sophisticated investment management tools to help you keep more of what you earn and to reach your financial goals.

Unlike many firms, Signet manages portfolios using in-house research and portfolio management. Because we rarely use outside managers, we can manage your money at a lower cost to you. This can translate into higher returns over time.

Founded in 1988, we manage approximately $800 million in assets with offices in Parsippany, NJ; Reston, VA; Chapel Hill, NC; Ft. Lauderdale, FL; and Naples Fl.

For more information, please contact Stephen Tuttle at 800-390-2755 or

 Important Disclaimers

Signet Financial Management, LLC (“Signet”) is a Registered Investment Advisor (“RIA”) with the U.S. Securities and Exchange Commission (“SEC”). Signet provides investment advisory and related services to clients nationally. Signet will maintain all applicable notice filings, registrations and licenses as required by the SEC and various state regulators in which Signet conducts business. Signet renders individualized responses to persons in a particular state only after complying with all regulatory requirements or pursuant to an applicable state exemption or exclusion.

This article is intended to provide general information. It is not intended to offer investment advice or to recommend the purchase and sale of any investment product. Information is provided to learn about our advisory services, our people and to be able to contact us for further information.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Signet) or any non-investment related content, made reference to directly or indirectly in this article, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Signet.

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