Transition

Transition

The transition from working life to retirement is a very dangerous financial time in your life. You are probably aware of the sensitivity of life style in retirement to the “Risk Zone”, which is roughly the 5-10 years before and after retirement. Losses during this critical time period inflict a double whammy on retirees:  (1) dollar losses are at their highest level because account balances are their largest, and (2) retirees can only respond with a reduced standard of living since re-entry into the workforce is limited. Export

 

Professor Moshe Milevski has popularized the term Risk Zone because Sequence of Return Risk can devastate lifestyles. The following exemplifies Sequence of Return Risk

 

Managing Sequence of Return Risk

 The simplest and most dependable way to manage sequence of return risk is to keep your investments safe.  This will of course create opportunity costs if markets perform well, but it is a price well worth paying because you only get to do this once. Behavioral scientists tell us that we feel the pain of loss much more than the benefits of gain. “Save and protect” is a very good mantra for retiring with dignity.

Because most ignore the Risk Zone, IRAs are exposed to excessive loss in this dangerous timeframe. The Employee Benefits Research Institute (EBRI) report on IRAs reveals that equity allocations are approximately 55% across all ages, a surprising reality.  Similarly, target date funds (TDFs) are also exposed to excessive risk, with an average 55% allocation near the target date. This is the allocation that lost 30% in 2008, and these losses are likely to repeat in your lifetime.

To guard against the devastation that lies ahead, we recommend very conservative asset allocations in the Risk Zone, with no more that 20% in stocks and bonds, and the balance in Treasury Bills and intermediate Treasury Inflation Protection Securities (TIPS). You may want to be more aggressive, and we will comply with your wishes, after a discussion.