Phase 2: Wealth Distribution

{4 minutes to read}  Last week, we talked a little bit about the three phases of a financial plan — Wealth Accumulation, Wealth Distribution, and Wealth Preservation. Today, I want to focus on what might be one of the more misunderstood areas, which is Wealth Distribution.

Wealth Distribution is the phase of retirement. This is when you have stopped working, and are now relying on your assets to generate your retirement income. There are a lot of risks that people face during Wealth Distribution; number one being market volatility, which we’re going to focus the majority of our time today on. Other risks include health care and the cost of extended care, longevity risk and interest rate. So let’s look at interest rate risk first today.

We are currently at a very low interest rate. That means bank products and bonds are very low, so they don’t generate a lot of money. If you have a million dollars in the bank or in bonds, you’re not going to generate a lot of income from that. Added to that is, if you buy bonds and interest rates move up in the next 10-20 years, then the value of those bonds will go down.

Longevity risk is the risk that you outlive your savings. People are living longer and longer. My wife’s grandmother lived to 103; my cousin lived to 103. John McCain’s mother lived to 108. So we don’t need to just plan for ages 65 to 85 which most people think is a normal life expectancy. Life expectancy can be misleading. So, if my normal life expectancy is 85, that means half of the people will live less than 85 years and the other half the people will live longer than 85 years, so people need to be financially prepared for both contingencies.

So, that brings us to market volatility, the one risk that is most written about. I have attached a video that is called the Hatfields & McCoys.

It’s the old rivalry between these two families and what the video points out is that if each family invested the exact same way, but had the exact opposite sequence of returns, their average rate of return would be exactly the same, but their results would be polar opposites.

I review a lot of financial products and financial plans, and there’s a general rule out there that, if you have a million dollars in a bank account, in stocks and bonds, or your portfolio, the most that you should be taking out based upon market volatility and longevity risk is about 4%, maybe even a little bit less. So that’s $40,000 a year of a million dollars.

Recently, I was reviewing somebody’s financial recommendation and they had a million dollars in an account. The financial product showed them taking out $90,000 a year from age 65 to age100. When I saw that, I recognized that there was tremendous, tremendous risk in that product, that scenario,  and that recommendation. Too many times, people think that they can withdraw from their investments during retirement, an amount of money equal to what their rate of return was during Phase One: Wealth Accumulation. But you see, as the video points out, when you withdraw money during down years, especially early in your retirement, it has a decumulation effect on your retirement income.

Watch the video and give us a call. We’d love to help you understand the planning that needs to get done so that you can properly and efficiently set up your retirement for your future.

Luck of the Draw

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS.  Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

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