The Retirement Shock Absorber®
Buffering market fluctuations
The Retirement Shock Absorber® is a proprietary financial and retirement planning tool we utilize to help address the inevitable ups and downs in the markets & in life. Applying this strategy in the creation of a comprehensive wealth plan helps the plan absorb negative market & life situations while attempting to preserve the minimum amount of retirement capital required. In times of market & life volatility, wise investors know to avoid the emotional decisions that may negatively impact a portfolio over the long-term.
Green Line: The green line represents the minimum capital required by a hypothetical client in order to maintain their lifestyle through retirement, but does not accommodate portfolio fluctuations.
Red Line: The red line is a hypothetical dramatization of market & life volatility on a portfolio’s value at any given time.
Blue Line: The blue line represents a plan incorporating The Retirement Shock Absorber®. This 20% cushion helps clients weather difficult markets while still maintaining their lifestyle.
Why do we use 20% as the amount of recommended buffer?
While the greater the buffer the better, we recommend at least a 20% Retirement Shock Absorber®, due in part to 2008’s impact on the capital markets and portfolios. In 2008, considered an outlier year, the S&P 500 Index declined -37.29%, while the Barclays Capital U.S. Aggregate Bond Index was up 5.55%. For a hypothetical portfolio allocated 60% to stocks and 40% to bonds, overall decline would be -20.15%. A 20% Retirement Shock Absorber® allows portfolios to withstand declines of the same magnitude without jeopardizing retirement.
Source: Data for calculations obtained from Morningstar, Inc. The S&P 500 Index is an unmanaged group of securities and considered to be representative of the stock market in general. The Barclays Capital U.S. Aggregate Bond Index is a broad base index often used to represent investment grade bonds being traded in the United States. An index cannot be invested into directly. Past performance is no guarantee of future results.
Why an 8% average rate of return over time?
Most often, our clients at or near retirement have portfolios allocated 60% to equities and 40% to bonds. Looking back at 83 years of hypothetical portfolio returns:
- a portfolio invested 100% in stocks had a compounded annual average return of 9.8%
- a portfolio invested 100% in bonds had a compound annual average return of 5.4%
- a portfolio allocated 60% to equities and 40% to bonds had a compound average annual return of 8.1%
Source: Morningstar, Inc. These returns assume reinvestment of income and no transaction costs or taxes. Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the five-year U.S. Government Bond. An investment cannot be made directly in an index. Past performance is no guarantee of future results.
What drives the construction of portfolios the seek to achieve an 8% annualized rate of return?
Several drivers are taken into consideration in order to pursue the goals of the Wealth Plan, including: Actual Inflation, Investment Returns, Repositioning / Rebalancing and Withdrawals.