Timing Retirement Myth @AdviceIQ

Twins_Grace_and_Kate_Hoare_1876Some people may have this idea that when you retire impacts how much you may take from your portfolio for income. This is a myth.

The idea comes from thinking that someone who retires with a higher portfolio balance is “lucky” to be able to have a higher income from that balance when using the common 4% rule. Someone who had that same portfolio balance, but then chose to retire a year later – say when the market had gone down some, i.e., they are “unlucky” – would not be able to take as much from their, now lower, balance using that same 4% rule. When viewed this way – this appears true. But, this is a myth – or better stated, a misperception.

My original blog posts explains this using twins as the example – so they are identical in every way except the year they chose to retire. And the “lucky” one, who is taking more from their portfolio, is actually the one who is more at risk of running out of money compared to the other who was “unlucky.” Why? Because the “lucky” one is spending more than they prudently should.

You see … with identical portfolio allocations, the markets’ ups and downs are going to affect both retirees portfolios the same. Some may think that they should adjust their allocation as a reaction to the market – my co-authored and peer-reviewed published research shows this is ineffective compared to simply making small adjustments to spending.

The article below describes briefly how you may properly view this apparent paradox. My original blog … The Apparent Paradox of Retiring Twins – Is it True? … that inspired my syndicated article below goes into detail with values to make a good comparison … you see – markets affect everyone in them the same – so the “lucky” may quickly become the “unlucky” and vice versa … the original blog explains a method based on peer-reviewed research to measure and monitor your retirement so you may stay “lucky” as long as you live.

PS. Another misperception is thinking that financial calculations, especially for retirement, are predictive. No one can predict future markets … thus, 1) Monte Carlo or stochastic modeling is used to determine a range of possible outcomes, and 2) results are better viewed as indicative of feasibility at that moment in time. The later one – a.k.a., annual reviews – what was once unknown a year ago, may be updated, and the process repeated for the coming year. Small adjustments may be done so feasible outcomes are possible for future years as well. This is an iterative process with periodic reviews rather than a set-and-forget process based on rules of thumb.

PPS. Some may be tempted to react to spending adjustments by structuring their retirement income much like a pension by buying an immediate annuity. My research collaborators and I have a paper that shows that this is probably not a good idea during younger retirement ages, and becomes a better idea for those older retirees – ONLY if they continue to expect to outlive 30% of their peers into even older ages. Blog post on the paper.

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