Unless you have a working crystal ball, timing the market is near impossible. You may get lucky once in a while, but prediction error and emotions eventually seem to set in, and then… the losses come. Whether you are a professional or not, greed tends to keeps you in the market longer than you should and fear tends to keeps you out of the market longer than you should.
Let’s make a clear distinction in what we are talking about. We are not talking about two-sided models that are designed to make money in up or down markets. Two-sided, quantitative models overall are not trying to “time the market”, they are trying to find trends and make money off of those trends. As purebred fiduciaries, we use two-sided models for our clients because they help take emotion out of investing. When we talk about “timing the market”, we are talk about investors who review data and try to make decisions based on the data and their intuition and or emotion.
With market volatility, and accepting the Efficient Market Hypothesis, that the market prices reflects all public information that is currently available, it can feel near impossible to find stability in your investments. Markets go up, and they go down… not to sound like a Geico commercial, but “it’s what they do”. Your retirement and your retirement income should not have the same kind of volatility.
What most are doing, which is fueling “retirement timing fear”
We believe that most retirement financial anxiety and instability stems from the popular 4% rule. The 4% rule suggests that if markets have averaged around 8% over the last hundred years, and bonds have averaged around 4% over the last 30 years, that you should be able to draw 4% from your portfolio each year and be fine. In theory, it works…as in if the markets only went up. Hopefully, we can all agree that markets don’t just go up…
Connecting your income to the market, which goes up or down, means your income can go up or down. It makes sense why there is so much anxiety around retirement when retirement income feels like timing the market, unsure and full of speculation (guessing). When it comes to proper retirement planning, there is a better way.
Understanding the principles that govern proper retirement planning
Before we dive into how you can time retirement, it is important that you understand the three principles that govern proper retirement planning. They are:
- Never Draw Income from A Fluctuating Account
- Diversify by Purpose, Not Just by Risk
- Use A Distribution Plan, Not the Pie Chart Guesser
Principle 1 – Never Draw Income from A Fluctuating Account
The technical term we are referring to is called “Sequence of Return Risk”, and it is unfortunately very common among retirees. This is how many retirees compromise their gains in the up years and accentuate their losses in the down years. It can be incredibly destructive, dangerous, and goes against the first principle of proper retirement planning. The solution? Draw your income from principal guaranteed accounts, whatever they may be. Not all of your assets need to be, or even should be, in principal guaranteed accounts. When it comes to drawing income, though, it must be from a principal guaranteed account, which brings us to the second principle that governs proper retirement planning.
Principle 2 – Diversify by Purpose, Not Just by Risk
When it comes to retirement, risk diversification is not the only important type of diversification. You must have assets and investments that are a source of income. You must have assets that have a long-term time horizon that you won’t need to touch for 10-20 years. Lastly, you must to have emergency assets set aside for when “life” happens. The Pie Chart guesser cannot offer this kind of organization, which brings us the to the last principle.
Principle 3 – Use A Distribution Plan, Not the Pie Chart Guesser
Only when you can map out your income distribution plan until age 99 (or whatever age you want), can you see how much you can spend in retirement. The pie chart guesses cannot do this for you. 30 years is a long time to “wing it”, which is why this principle is fundamental to a retiree’s success. Being able to incorporate your dream retirement narrative with all your unique plans is critical to getting transparency and reliability you want and deserve.
Timing your retirement
When you incorporate all three principles that govern proper retirement planning, you can answer some of the most difficult questions retirees and near retirees’ face. They are 1) can I retiree, and 2) if so, how much can I draw without running out of money.
With a math-based, principle-based approach, you can plan your retirement and when it should start, regardless of market conditions, cycles, or turbulence. When you have a proper retirement plan, you can sail through market turbulence, unaffected.
There was a small group of retirees that retired in 2007 and sailed through the 2008 financial crisis, unaffected. They didn’t even have to change their travel plans…
The only question that remains is “do you have enough to retire today?” That can’t be answered unless you run the numbers in a distribution plan… the pie chart guesser will leave you to play retirement roulette, which puts you back in trying to time the market, or your retirement. When you put together a distribution plan that follows the three principles that govern proper retirement planning, your plan gains significant strength, transparency, and still gives you flexibility. Don’t give yourself the unnecessary financial stress during some of the best years of your life. Plan ahead so you can enjoy A Safer Retirement.
