Today’s retirees face many risks, but one of the greatest of these risks is longevity, or the risk of outliving one’s savings. The fastest growing segment of our society is those over the age of 100. It’s unlikely that a person who was retiring in the 1970s at age 60 was thinking about their cash flow needs at age 100, but the miracle of modern medicine has made the gift of longevity a financial risk for which planning is necessary.
At Tradewinds Capital Management we don’t believe that the average person entering retirement should simply move everything to bonds and live off the income. First, bonds can drastically underperform other asset classes in a rising interest rate and inflationary environment. Secondly, with today’s interest rates at historically low levels most retirees don’t have the capital necessary to generate adequate amounts of income entirely from bonds.
This is why we recommend a diversified account based upon a retiree’s risk tolerance and time horizon. The primary benefit of a diversified account is that a retiree is not over-concentrating their risk into one area. For instance, bonds are highly susceptible to interest rate risk and inflation risk. The simple act of diversifying the account into multiple asset classes spreads and lessens the negative effect of any specific risk such as interest rate or inflation risk.
In order to generate the income necessary from a diversified account we utilize a cash flow method called DIESEL. The DIESEL process was documented in the September 2006 issue of the Journal for Financial Planning by Stephan Quinn Cassaday, CFP®. DIESEL stands for Dividends, Interest and Equity Select Liquidations. Utilizing this method we can create our own retirement paycheck through a diversified portfolio that emphasizes the total return of the portfolio, not just the income from bonds. And if the diversified account has a better overall total return than an account concentrated in one asset class, like bonds, the retiree can withdraw a bigger paycheck while reducing their risk in a diversified environment.
The advisors at Tradewinds Capital Management are here to help you create an income/cash flow plan that works for you. Whether you utilize the DIESEL method or a more traditional method that relies on taxable and/or tax-free bonds and dividend paying equities, we can help you implement your plan and help you understand your exposure to one of the greatest risks to your retirement portfolio…LONGEVITY.