Retirement Cash Flow Management

Three-Pooled Approach

During the years of saving, downside volatility in a portfolio often provides an excellent buying opportunity due to the longer time horizon.

However, when in retirement and withdrawing regular income from your portfolio, decreases in market value could be very costly to your 30+ years of retirement.

The traditional approach to managing retirement portfolios is to increase the weighting of bonds or fixed income, reducing the allocation to equities or stocks to reduce the expected volatility. This approach typically uses rules of thumb based on your age to arrive at the recommended asset mix. While we understand and appreciate the need to reduce portfolio volatility leading into and through retirement, we disagree with a rule of thumb. 

Instead of using a client’s age as the key determinant, we consider the need for cash flow per year from each portfolio when determining the asset mix. Building a retirement portfolio focusing on the absolute value of the income required relative to the portfolio's overall value ensures there is enough cash and lower-risk investments to withstand periods of volatility without jeopardizing the long-term growth.

For example, a client may place two years of required income in cash or a risk-free asset, and an additional two years in a low-risk investment, creating a four-year cushion in defensive of extreme volatility. The balance of the portfolio is then focused on long-term growth assets.

This three pooled approach of cash, low-risk investments and growth, significantly reduces the possibility of withdrawing funds from assets that have recently had negative or flat returns, therefore protecting the investments' long-term nature.