Money Management For Your Drawdown Years

Written by Doug Dahmer  |  February 5, 2015

Despite the fact the retiring boomers are a huge group with enormous clout and wealth, no one in the investment industry talks Doug Dahmer Imageabout the fact they are headed for a big financial pothole. The trouble is that everything that baby boomers have done to build wealth will be undone if they keep doing what they have always done.

If you read my blog “The Mathematics of Catastrophe”

you will know about the impact of early stage investment losses on retirement income. If you did not, pop back and read it so you will have context for what I am going to say here.

I will wait.

Now you know. If you have assets that must contribute materially to your retirement income and if you follow the traditional buy and hold investment philosophy touted by most of the investment industry then you better be very lucky or stop doing it.

You need a different investment approach as you near retirement because ‘time’ has now shifted from being your friend to being your enemy. You cannot outwait the downturns – you are not forced to drawdown on assets to meet your lifestyle needs.

The traditional investment philosophy you came to rely upon during your accumulation years is no longer good enough. The goal of these managers is to provide you with a ‘better off’ outcome. They were selected on the basis of their relative performance to their peers. In their pursuit to outperform they would often take on additional risk. They operated like huge impersonal machines – it was not necessary to know who you were or what you wanted to do.

‘Better Off’ versus ‘Real Life Financial Success’

In your drawdown years, ‘Better Off’ is not good enough. Now your focus must be upon ‘Real Life Financial Success’ – the safe delivery of the funds you need, exactly when you need them.

You need a money manager who follows the same disciplined approach used to successfully manager an endowment or pension fund. The managers of these structures ensure they are constantly aware of exactly how much money is needed and precisely when it is needed. They are selected on the basis of their ability to consistently meet both short term and long term pay-out obligations. One of their primary jobs is to move assets between asset classes in such a way that they are able to distribute the cash where and when it is needed.

This is the kind of money management you need as you approach and enter retirement. If you do not use it and let unmanaged market gyrations be a part of your retirement planning you will be wrong and poorer more often than you will be right and wealthier.

The right kind of money manager will always have enough cash ready for your needs while not forcing a fire sale on your longer-term assets. You will see in the “Investment Policy Statement” (IPS) good money managers provide, how percentages of assets migrate to cash from fixed income and equities in an orderly and methodical process.

How do you identify the right kind of manager? The really good drawdown managers can be recognized by 3 key characteristics:

  • The good drawdown money manager is obsessed with avoiding risk. They recognize how hard it is to make up a loss in the absence of a long time frame.
  • The good drawdown money manager is not concerned with relative performance. They do not care how they perform relative to their industry peers, only how they perform against your short term and long term demands for cash flow.
  • The good drawdown money manager is aware of your planned year-by-year income needs. With that information as part of your investment policy statement it ensures that they are shifting allocations closer to cash as these drawdowns approach.

You will know you have found the right manager when they can say: “We acknowledge your drawdown requirements and your portfolio will be run according to a strict process and procedure to deliver to that requirement for the prescribed time period.”

Now the question remains, when do you move from a manager that excels at accumulation to a manger that excels at drawdowns? The answer is: at least five years before your retire. The upside of waiting longer is much smaller than the devastation of getting caught in a downturn just before you begin to rely on these drawdowns to provide your retirement income.

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