DeVol Insurance & Financial Services
Winter 2017  

Navigate the Market's Peaks and Valleys

The American stock market has been experiencing several years of great performance. But as the old Blood Sweat and Tears song reminds us,

What goes up must come down
Spinnin' wheel got to go 'round
Talkin' 'bout your troubles it's a cryin' sin
Ride a painted pony let the spinnin' wheel spin

We imagine the inevitable market downturn and the many forms it could take. How steep? How long? How many false bottoms? How will it affect your
retirement income? How resilient is your investment portfolio?

Examples to Consider

Picture this scenario. (In this example, the portfolio value mimics the stock market's ups and downs.) So, you launch your retirement and decide you'll 
take 5% annually from your $500,000 portfolio. This first year that withdrawal amounts to $25,000

The second year your portfolio grows 10% to $522,500 and your 5% withdrawal is now $26,125.

Now, what if in the third year the portfolio drops 20% to roughly $496,375? Withdraw the same 5% that year and you get only $19,855, which is a 24% decrease in your income from the prior year.

Let's say the fourth year the market is flat. Your 5% withdrawal is now $18,862.

And look at the changes to your portfolio value in this example. After only four years it has diminished to three-quarters of its original value. 

Here's an illustration of this scenario:

What if the market ...
Beginning Portfolio
Withdrawal, Level %
Ending Portfolio
Year 1
5% or 25,000
Year 2   ... increases by 10%:
5% or 26,125
Year 3   ... drops 20%:
5% or 19,855
Year 4   ... stays level:
5% or 18,862

Let's try that again, this time withdrawing a steady dollar amount each year, rather than a percentage. And we'll adjust 2.5% annually for inflation. As the
illustration below shows, your withdrawal amounts are constant, which is useful, but the portfolio value decreases by more than 30% in four short years.

What if the market ...
Beginning Portfolio Withdraw + Inflation Ending Portfolio
Year 1
500,000 25,000 475,000
Year 2   ... increases by 10%:
522,500 25,625 496,875
Year 3   ... drops 20%:
397,500 26,265 371,235
Year 4   ... stays level:
371,235 26,921 344,314

The Bucket Approach

Is there a way to avoid these dramatic changes? Yes! One solution is to use the Bucket Approach. Here you have three buckets:

One bucket is for immediate needs and is invested in liquid funds, like cash.  The second bucket is for intermediate-term needs and is invested in instruments with a 6 to 10 year time horizon.  The third is for long-term needs and is invested with the expectation that the funds will not be needed for at least 10 years.

Below is a bird's eye view of the three investment-type buckets. 
[These illustrations are hypothetical and are not indicative of any specific investment. Your results will vary.]

We at DeVol Financial are very fond of this strategy. The ongoing administration tasks can get involved, and we're happy to report that we have a found a 
company to handle the complexity. Take a look at this  brochure from SEI , especially pages 2 and 3 .

Keep this in Mind

A potential downside to this Bucket strategy relates to the performance of the overall portfolio. Take the same $500,000 portfolio from which you are withdrawing  $25,000/year. Your short-term bucket, designed to accommodate withdrawals, would need to be $25,000 times 5, or $125,000. $125,000 of a $500,000  portfolio is 25%. Holding 25% cash in the portfolio, at a time of very low interest rates, may be a significant drag on performance. 

Of course, if you had  $1,000,000 from which you are withdrawing $25,000/year, the required $125,000 constitutes only 12.5% of the portfolio -- a much better situation. 

Total Portfolio
# Years Cash Bucket
% of Portfolio
25,000 5 125,000
25,000 5 125,000 12.5

  Selected Retirement Planning Articles


Thomas Phelps DeVol is the founder of DeVol Insurance & Financial Services. He enjoys helping people transform their hopes about the future into attainable retirement plans. His persistence, know-how and diligence are the keys to his success -- and that of his clients.

Tom has three children and lives with his wife, Connie, and their youngest children in Newton, Massachusetts. He enjoys gardening, tennis, jogging and opera.


Tom can be reached at 617-964-6404 or via email.  

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Securities offered through Parkland Securities, LLC. Member FINRA/SIPC. Investment advisory services offered through Sigma Planning Corporation, a registered investment advisor. DeVol Insurance & Financial Services is independent of Parkland Securities, LLC and SPC.

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