retirement portfoliosCreating sustainable retirement portfolios is as much art as science. The tendency to view our annual capital projections as only science, due to the mathematics of a sophisticated spread sheet, all too frequently lulls clients into compliancy because the “math works.” The reality is these projections are worthless as soon as the ink dries on the paper on which they are presented. The value of these projections may only be seen over time; the review of annual outcomes over a period of at least five years. What is important is the trend. Because the math involved seems to blunt critical judgment my purpose is to afford additional perspective and hopefully provide you with a more realistic way to understand your personal capital projections.

It has been remarked that one has never seen a level of wealth, or income, which cannot be outspent. I am not suggesting clients are profligate. What I am suggesting is that the world is filled with uncertainty; assumptions about future portfolio returns, tax rates, inflation rates, financial needs, etc. heighten the challenge to meet future cash flow needs. Furthermore, portfolio withdrawals exacerbate the impact of market declines during the retirement/distribution phase of life. Bottom line, the shift from accumulation to distribution requires a markedly different model.

A Paradigm Shift

The notion of “retirement” is actually a recent concept and one that has already become an anachronism. We are beginning to see the concept of retirement evolve into “serial” or successive careers. Throughout human history people never thought in terms of “retiring.” One worked until death. According to Ken Dychtwald, for 99% of human history, life expectancy was age 18. No, this is not a typo. People did not age, they died.

On the first day of the 20th century there were 76 million Americans and life expectancy was 47 years. With the advent of penicillin, and antibiotics as a class of drugs, life expectancy leaped to age 60. On the last day of the 20th century there were 76 million Americans over the age of 50 – twice the population of Canada. Life expectancy for today’s newborns is 76 years, but the more affluent tend to live longer and in better health. The reasons for this primarily revolve around access to better health care and a predisposition to take medications as directed.

(In the U.S. 77 percent of all pharmaceutical products sold are purchased by those over age 50, and many of these drugs are taken prophylactically. There are approximately 100,000 research projects going on that could lead to additional longevity breakthroughs.)

The U.S. Census Bureau projects by the year 2020 there will be 115 million adults over age 50. Dychtwald, and others, believe it is not far fetched to expect large segments of the population to reach age 100 with some people reaching somewhere between age 120 and 140. Ideally we want to lead a long, healthy, productive life and compress the period of illness and disability in old age into an ever smaller period at the end of life; this is called “morbidity compression”.

Demographically, we are clearly living in unprecedented times; for the first time in human history we have mass populations of 50, 60, 70 and 80-year-olds. Furthermore, this longevity explosion has take place in only the past 100 years – and is highly likely to continue. The implications of increasing longevity are complex and far reaching; America is becoming a “gerantocracy”. What was once the poorest segment of society has become the wealthiest segment.

When I use the word “retirement” from this point forward, I will be referring to the concept of “serial” retirement while incorporating the concept of “financial independence”. We define financial independence as: that point in life at which you can elect to continue to work, or not, because you have accumulated adequate financial resources to maintain your lifestyle (adjusted for taxes and inflation) without the need for earned income.

We have redefined the concept of retirement to include the following assumptions:

  • While life expectancy is advancing, current mortality tables do not assume any medical advances. This is why we use age 100 for our projections: the real risk is not that you may die before age 100; it is that you may outlive your capital.

Couple-Age 65 – the Probability of at Least One Spouse Living to Age…

Age 70













  • Future inflation, tax, investment growth, and withdrawal rates, etc. are all      guesstimates; seemingly minor changes in each may materially effect the      outcome.
  • Further complicating a sustainable retirement is determining which accounts to      liquidate and in what sequence: qualified or non-qualified retirement plan      accounts, real estate, annuities, business interests, trusts, etc.
  • Spending patterns for the affluent have a tendency to rise over time, particularly    during the early distribution phase.
  • While historically “average” investment returns may be an acceptable assumption during one’s “accumulation phase” of life, financial modeling is much more complicated in the cash distribution years.
  • Transfer Risk. Traditional retirement income came from Social Security, defined    benefit plans and personal savings. Contemporary retirement income will      largely, perhaps exclusively, be funded through personal savings. By      transferring the risk of retirement funding from infinite-life institutions to individual mortals, investment risk and longevity risk move to center stage.

Distribution Planning and Cash Flow

Consider the following chart:




(No Withdrawals)


(Annual 5%   withdrawal on 12/31

Stock Market Decline

Number of Events (Since 1967)

Return Required to Break Even

Return Required to Break Even

































What this chart clearly demonstrates is, during the distribution phase, systematic portfolio withdrawals exacerbate losses due to the compounding effects of negative cash flow. Furthermore, to recover from such losses requires a materially more robust – and unlikely – future investment return. The resulting reduced capital base, therefore, can result in unrecoverable losses and financial failure. In other words, the margin of error materially narrows during the distribution phase. Said another way, a portfolio generating “retirement cash flow” cannot tolerate significant declines before capital is exhausted. In addition to the magnitude of decline, the speed and duration of the decline will heavily influence the time required for (or feasibility of) a portfolio recovery.

Here’s the point: sequence matters! Over varying time periods or with different withdrawal rates, the sequence of returns will have a major effect. The difference may be dramatic or not matter at all. Investors during any phase are vulnerable to market gyrations, but investors in the distribution phase are more susceptible to unfortunate timing. Because there is no way to control the sequence of returns, we recommend the use of conservative assumptions and adequate liquidity to insulate us from taking distributions during market downdrafts. No less important are our annual planning reviews in which we re-test and re-validate assumptions.

Creating sustainable retirement portfolios is as much art as science; or in the words of one of the most influential economists of modern times, Alan Greenspan: “With economic policy, you have to orient policies toward non-probable outcomes.”

To learn more about Marshall Serwitz view his Paladin Registry profile.