Investment Strategies
The financial markets can feel like a rollercoaster that tests even the strongest stomachs. But it is possible to limit the impact of market drops by structuring your investments according to time and purpose. For example, a conservative approach is more appropriate for assets you’ll need earlier in retirement. A growth approach maximizes assets that you won’t need until later in retirement.
Many financial advisors counsel their clients to invest by account type, treating IRA’s one way and brokerage accounts another way. But this approach does not manage the sequence of returns risk associated with market corrections early in retirement.
By structuring your investments according to time and purpose, the Marsh Wealth Management team can help you limit the impact of these negative events.
Diversification is another critical wealth management strategy for limiting market losses. Asset classes — large cap, mid cap, small cap, value, growth, domestic, international, long bonds, short bonds — all have different risk characteristics, and they function differently in different economic environments. A truly diversified portfolio is paramount to managing market swings.
The Marsh Process
Marsh Wealth Management uses the following process when developing investment strategies for customized wealth management plans:
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We identify your risk personality segmented by time. We determine how risk-averse you are for money you need to withdraw and spend “soon.” Then we assess your risk tolerance for money you won’t need until “later.”
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We assess your current investment strategy and portfolio diversification against your risk personality.
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We design an Investment Bucket Strategy to support your wishes, wants, and needs over time — now, soon, and later.
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We assess the tax efficiency of your current investment strategy.
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We identify and document a tax-efficient order of asset withdrawal at retirement.
The Fragile Decade
The five years leading up to retirement and the five years after retirement are known as the Fragile Decade. This is when market downswings can most negatively impact how long your retirement assets will last. Consider this example:
John and Sue retire at age 65 with $500,000 in identical balanced portfolios and plan to withdraw $25,000 annually, adjusted for 3% inflation.
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John retires as the markets go down. He averages an 8% return but runs out of money by age 83.
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Sue retires in a market rally. She averages the same 8%, with her corrections coming in later years. Her portfolio at age 90 is $1.6 million.
Why the disparity? Markets don’t give averages; they give you actual returns that work out to an average. The order in which you earn that average really matters. If the market has a downswing in your Fragile Decade, it can forever change the trajectory of your retirement.
The risks inherent in the Fragile Decade underscore the critical nature of retirement income planning. The old way of investing for retirement was to keep a little pile of money at the bank, invest the rest in market, and hope that you have enough to last your lifetime. But that strategy does not account for the potentially devastating impact of market corrections.
Marsh Wealth Management uses a more sophisticated planning philosophy that helps manage the unknowns of the markets. We develop a financial plan that segments money into three different buckets — Now, Soon, and Later — based on your investment time horizon, your risk tolerance, and your future income needs. The resulting financial plan will help you weather the Fragile Decade more effectively.
The Impact of Market Losses
When is the next market downturn coming? How much money could you lose? Will the markets recover enough to keep you from running out of money? While it’s a fact that no one knows when the next economic downturn is coming, retirees will likely face several down cycles during their 30+ years of retirement. In fact, the US economy has experienced 3 recessions and 11 stock market corrections of 10% or more in the past 30 years. In three of those corrections (some of us call them crashes), the stock market declined 19% or more, and two of them saw a decline of over 30%.
Longer life expectancies mean you have more time, which is the good news. But more time increases the likelihood that you will face more obstacles in your retirement years, like market corrections, a major health crisis, rising inflation and living costs, and tax increases. Unfortunately Murphy’s Law has shown that these risks rarely happen in isolation. It’s entirely possible for the stock market to take a dive at the same time your spouse gets a scary diagnosis and Congress raises tax rates.
Our Bucket Strategy approach can help manage these uncertainties to give you peace of mind and confidence in your retirement plans.
Independent Investment Custodian
Sadly, we’ve all read about investment advisors who bilk unsuspecting retirees out of their life savings. That’s why it’s important to state unequivocally that we do not hold any of your assets. Instead, we use Charles Schwab as an independent custodian for investment accounts we manage on your behalf. They hold over $7 trillion in assets and service almost 34 million accounts. You will receive monthly electronic or paper statements directly from Charles Schwab, and you will have 24/7 online access to your accounts through their online login portal.
The Money Cycle
You’ve probably spent much of your life dutifully saving for retirement. You have likely taken advantage of tax-smart savings vehicles like IRAs, Roth accounts, 401(k)s, and other employer-related retirement savings options. This is the optimal approach in the Accumulation part of the money cycle, when you are still generating employment-related income. Most financial planners excel in this part of the money cycle, which focuses on wealth accumulation.
When you near or enter retirement, though, you need a financial advisor who understands the importance of preserving a strategic portion of your wealth (within the context of your financial plan and stated goals) to ensure it’s there when you need it. This is where the often overlooked Preservation phase comes in. Most financial planners skip right over this step, going straight from Accumulation to Distribution. But doing so can come with significant risk in real dollars and opportunity costs.
As you transition from Preservation to Distribution, your needs shift again. At this point, it’s essential to have a highly reputable financial advisor who also understands the tax implications of your investments. The CPA-fiduciary team at Marsh Wealth Management will help you navigate Required Minimum Distributions (RMD) and other tax laws while planning tax-smart distributions in the right order. Our goal is to ensure you don’t pay more in taxes than you should.
