, Newburyport, MA

November 1, 2011

Stop worrying, begin to love volatility

Money Matters
Donald E. Askey

The new normal is that every day brings a 50 percent chance of calm and a 100 percent chance of uncertainty.

For those of us in the middle ground of approaching or entering that stage of life called retirement, uncertainties were not part of our earlier plans for this time. We thought of second homes, traveling, lots of time with family. We thought that not having to work meant we had earned this time for enjoying life and experiencing general peace of mind. That was the old normal, anyway.

I have spent two decades now counseling retiree-wannabes and bone fide retirees about how to enjoy the time they have and set aside their money worries. In that time I have come to learn that some people are hard-wired to worry about money regardless of their circumstances. If you can't relax about money, my best recommendation is yoga, at least two or three times a week. It's all about breathing properly and controlling your thoughts.

I also offer some financial strategies for the hard-core worriers and for those genuinely interested in getting beyond the money stuff and living with peaceful minds.

Let's start with predictability, which is the opposite of all of the uncertainty around us now. If more predictability in your financial affairs sounds appealing, then consider a few small steps.

Operate on a budget and be clear about what expenses are essential and what expenses are discretionary. This is a money area you have control over. Married individuals have to work with their spouses.

Increase your predictable retirement income, the amount that comes in, regardless of the market, the money you cannot outlive. It will last as long as you or your spouse lives. One way to do this is to delay taking Social Security until age 70 — a strategy that may be easier than you think.

Another way to increase predictable permanent income is through the use of annuities, either immediate or deferred. Despite what you may think, annuities, if sold and used properly, can deliver both income and peace of mind.

For the income you may rely on from your bank accounts or your investments, be very cautious of two percentages, which can literally make or break your retirement dreams. Modify your expectations of investment growth and carefully manage your withdrawal rate. The new normal for investment growth is an average annual 5 percent, maybe 6 percent, over 10- to 15-year periods. If you expect or demand more, your disappointments will rise in direct correlation with the additional risk you may be taking. Disappointments lead to anxiety and loss of sleep. Not what retirement's supposed to be about.

In terms of withdrawal rate and the life expectancy of your investments, the common rule of thumb is to withdraw no more than 4 percent in the first year of distribution and adjust for inflation each year thereafter. Calibrating the withdrawal rate to give you maximum income without risk to your restfulness is critical. That calibration, which requires discipline and skill, needs to take taxation, as well, into consideration.

The final consideration in improving our mental well-being on the verge of or during retirement in these volatile times is to think "reasonably predictable income stream" over time. What is a reasonably predictable stream of income from our investments and for how long? We want our retirement savings to last at least as long as we do.

The "reasonably predictable income stream" is a mind-set completely different from the pre-retirement idea of accumulating accounts as big as possible. In the retirement phase the size of the pile is less important than the duration of the pile. Ideally, the pile's done the day we die, assuming we are not motivated to enrich our heirs.

The size of the pile will naturally diminish during the retirement decades. We lose sight of its real value, if we focus on its size. Peace of mind in retirement comes from the predictable amount of income distributable from the remaining pile based on our life expectancy.

If you are looking for more predictability and restfulness in your retirement, pay close attention to the things you can control: your budget, when you claim Social Security, your growth expectations, your withdrawal rate and whether you look at your retirement savings as a pile to preserve or a pile to spend and enjoy.

Once you have mastered these controllable things, you can stop worrying and begin to love volatility, which you can't control.

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Donald E. Askey, a Certified Financial Planner™ professional and president of Provident Advisory Group, is a registered fee-only adviser, headquartered in Newburyport. For questions, visit