Financial Advisor Michael Gerstman on navigating the Distribution Phase of retirement savings

Retirement planning is a much discussed subject among financial advisors and their clients. The truth of the matter is that if you have an advisor who aligns you with a decent money manager, the combination of the money manager being competent, along with a stock market that trends upward, should allow you to save enough money for a prosperous retirement. This, of course, assumes that you have invested sufficient monies over time for your retirement.

The reality of retirement planning is that it’s similar to taking on Mount Everest. Many climbers who face this natural wonder successfully make it to the top. It’s the descent down the mountain in which people find themselves in trouble. The same can be said for retirement planning. Many savers will make it up the retirement planning “peak,” also known as the accumulation phase. As you accumulate money throughout your working years, you have options on what you can do with these funds, even if there is a severe market downturn. You can continue to fund your retirement plan, increase your plan contributions or you can simply delay your retirement until the market gets on a more solid footing.

However once retired, the descent down – or distribution phase – can get a little rocky. The real peril lies in the fact that once you stop working and give up the source of your investment dollars, you are completely at the mercy of the financial markets to perform for you. Without decent market performance, lies the very real potential to destroy your retirement account.

Imagine this scenario: The year you stop working and start taking distributions from your retirement account, your investments drop by 14 percent. Now, imagine your investments drop an additional 25 percent throughout your second year of retirement. Finally, let’s compound this problem by the fact that you need to take distributions from these accounts to live and pay your expenses. This exact scenario will be the foundation for a disastrous retirement with the likelihood that you will run out of money in your golden years. That is an absolutely terrifying thought. Like on the descent down Mount Everest, this is where it ends for those who try to navigate their own way down.

Many advisors do their clients no favors in the respect that they have not adequately prepared their clients for the distribution phase of retirement. In the accompanying graphs, the accumulation and distribution phases both have an annual rate of return of over 11 percent. At face value, most people would jump at this. While you’re accumulating money, it is important to have that money grow with good annual returns. To prove the lack of importance in the “accumulation phase” chart, I’ve illustrated an annual earnings rate on the left side. On the right side, I took the exact same figures in the annual earnings rate and reversed the order. So, what was shown in year one on the left is shown in year 15 on the right. I simply did the earnings rate in inverse order and in both cases the annual return is 11.31 percent, with virtually the same amount of money accumulated.

In the second chart titled “distribution phase,” I did the same thing with one exception. I started annual withdrawals of $200,000. In this chart, I demonstrate that when taking income, sequence of return is much more important than the earnings rate. If your investments do well in the early years of distributions (illustrated on the right side of the “distribution phase” chart), you will likely have a wonderful retirement. On the left side of the same chart, I showed that in the early years, the investments did poorly and by year 12, you’d need a “magic checkbook” because you would have run out of money if you continued to withdraw $200,000 per year. This is the disaster that every retiree worries about.

The good news is that things are not all gloom and doom. There is a solution to mitigate this type of risk. The solution is to setup an account that is not correlated to the stock and bond markets, which will allow you to draw from when the markets have negative years. This will give your investments the time needed to have them recover. Additionally, if this fund is set up properly, you will have the ability to withdraw the annual income you have become accustomed to living on.

So I’m asked, “When is the best time to set up this non-correlated account?” The answer is when you start saving for retirement, you would like to make sure you’ve accounted for all possibilities. I am also asked on a regular basis, “When is it too late to set this up?” or “I’m already retired and taking distributions, did I miss my opportunity?” This answer is a resounding no. It’s not too late, ever. You can still make up for lost time. You might shift assets into the non-correlated account to get it to the robust state that will take you through the rest of your life.

The big take away from my thoughts are that your rate of return is not as important as your sequence of returns. If you had the good fortune and wisdom to set up this non-correlated account, you’re in great shape. If not, it’s never too late for a prosperous and peaceful retirement.

Michael Gerstman is a Financial Advisor at Gerstman Financial Group, LLC, where his primary goal is to help clients achieve financial freedom. Michael grew up in Bellmore, New York and received his Bachelor’s Degree from Albany University. He went on to further his vast knowledge of the financial industry by acquiring the ChFC, otherwise known as the Advanced Financial Planning designation through the American College of Financial Services. He was also awarded the CLU designation, earned by those who wish to specialize in life insurance and estate planning. Now, Michael lives in both Dallas, Texas and Ft. Lauderdale, Florida and has been in the financial services business for over 25 years. He services clients across the country. His specialties include asset and income protection, wealth accumulation, and tax minimization strategies. Michael works closely with business owners, professionals, pre-retirees, and retirees. His success is determined by the delight of his clients, and his genuine care for them, along with his professional expertise which sets him apart. Michael can be reached by phone at 214-205-6841 or via email to