Nervous retirees often worry that they might lose everything in a volatile market. Yes, if you only own one stock, you could lose it all. But if your portfolio is diversified, the majority of it remains stable like the water beneath the waves. Below the wave height line, much of the water is undisturbed.
Lots of the discussion on retirement income should be understood through perspective of where the point is viewed from. There are, in general, two schools of thought.
1) Safety-First perspective: Stands on the shore and envisions moving out into deeper waters later in retirement. The years since retirement are counted UP (1, 2, 3, 4, 5, … 10, … 15, etc).
2) Dynamic Updating: Starts out in deeper waters and envisions moving towards shore. The years remaining in retirement are counted down (etc., … 25, … 20, … 15, … 10, … 5, 4, 3, 2, 1).
In other words, both describe progressing through retirement the same (it’s the same ocean), it’s just that they both start and end on different ends of the ocean – the shore or deep water!
Both schools of thought co-exist because they’re looking at the same problem, sustainable or prudent retirement income for life … but … from different ends of the spectrum. Here the different ends of the spectrum in the ocean metaphor are starting from the shore versus starting from the deep water.
The “surf zone” is where uncertainty becomes important and how to address it are the essentially the same for both schools (immediate annuities, reverse mortgages, higher positions in cash or short term instruments like CDs or short term bonds, etc). The difference in views is at what age are those solutions applied? Early in retirement are at older ages later in retirement? In other words, where is one standing when retirement begins and where does one go as they age through retirement … through which of the two points above is the discussion seen?
My original blog argues towards the later. Original blog that goes into more depth (pun intended) … Is ALL of your portfolio at risk of loss? … that inspired my syndicated article below. For further insights, please read the comments to the original blog as well.
Finally, the point of the article is that most people view their entire portfolio at risk. When properly diversified, not all of the portfolio value is at risk. The ocean analogy helps visualize this.
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