Why Most Income Plans Fail

By Jason Veinot

As we save for retirement during our working years, traditional investment planning provides many proven strategies to help investors accumulate a nest egg.

However, when you retire and your income needs change, traditional income planning gets it all wrong!

Too often, brokers advise you to merely change your allocation using “less stocks and more bonds” to reduce risk, and to take “systematic withdrawals” to satisfy your income needs.

This won’t work. In June 2011 the U.S. General Accounting Office produced a 79-page report on Retirement Income (www.aging.senate.gov/letters/d11400.pdf).

The No. 1 threat facing those in retirement, the report stated is the potential of negative market returns early in the retirement process.

A few poor years early on could destroy the security of your financial future.

“Reverse” Dollar Cost Averaging is the problem.

With traditional Dollar Cost Averaging, contributions of equal amounts are regularly invested into a portfolio while you are saving for the future.

Investors purchase more shares when prices are low thus maximizing profits over time.

But with “Reverse” Dollar Cost Averaging, withdrawing income when the stock market is moving lower means you must sell more of your portfolio to meet the same income need.

Therefore, fewer shares remain to benefit when stocks rebound.

Dr. David Babbel, professor emeritus at the Wharton School of Business, concludes that with “Reverse” Dollar Cost Averaging, a retiree has a 90% chance or higher of running out of money (over 30 years).

In his academic brief, “Investing Your Lump Sum at Retirement,” Dr. Babbel recommends allocating a portion of your portfolio to create a “Personal Pension” that provides guaranteed income payments for life.

This protects against market and economic volatility with consistency in an uncertain world.

At our company, Enhanced Capital, we recommend this approach in conjunction with a separate growth account to be used for inflation protection and additional expenses.

Securing your income without relying on market movement is smart investing.

You need to develop certainty in an uncertain world and leave nothing to chance.

Jason Veinot is President of Enhanced Capital, LLC, and provides innovative solutions to help clients “Live Well” in retirement.
Contact him at (859) 231-6622