As Americans live longer, investors should seek portfolio consistency, not just growth

—Risk of outliving assets is serious issue—

This is the year when the first wave of “baby boomers” turn 60, a milestone that prompts many people to seriously face the concept of retirement, particularly the need for income when they’re no longer employed.

Yet although this generation (born between 1946 and 1964) has, collectively, amassed great wealth, their position in history has imposed on them a new challenge: implementing a plan to ensure a stream of income to last for several decades. Their average life expectancy is 84, meaning their retirement years could match— or even exceed—their working years.

Living much longer

Many of these people will find their company pension plans and retiree health insurance have been reduced or eliminated.

Any savings they have will probably have to be stretched in different directions, for many years. As a result, most people in this age group need a specific plan to help ensure that they will not outlive their retirement savings.

How we help

Before our clients begin taking distributions from their retirement portfolio, we counsel them on three very important factors:

Factor #1: Portfolio withdrawal rates

For people who want to reduce the likelihood they will outlive their retirement savings, we recommend they withdraw a fixed percentage, rather than a fixed amount, from their portfolio each year. This method helps people avoid having to sell a disproportionate number of shares when the market is down, in order to meet a fixed-dollar amount.

Most of our retired clients withdraw 4% or 5% of their portfolio’s value annually, with periodic minor adjustments for inflation. Although they may have to adjust their standard of living to accommodate some variability in income, it’s far better than running out of money in the future!

Factor #2: Focus on “consistent” returns, not market indices

It’s important to under-stand that it’s not the average rate of return that determines the success or failure of an investment strategy, but the way in which investment returns are produced. Long-term invest-ment history proves our point.

For an objective example, I will cite the actual 30-year performance history of the well-known American Mutual Fund (AMF) and the popular Standard & Poor’s 500 Index. Let’s say that on January 1, 1970, someone invested $100,000 in the AMF fund and in a portfolio of stocks reflecting the S&P 500 Index. Let’s also say that the investor implemented a withdrawal strategy whereby 5% of each portfolio was withdrawn at the end of the first year, and that this initial withdrawal amount increased by 5% every year thereafter to account for inflation.

Over that 30-year period (summarized above), both portfolios had similar average annual returns: 13.43% for the mutual fund and 13.72% for the S&P 500 portfolio.

You might think the ending balance in each portfolio at the end of 30 years would be similar, as well. But it wasn’t.

After 30 years of regular withdrawals, the AMF portfolio would have had an ending value of $1,296,113, while the S&P 500 portfolio only $555,561.

Why the disparity?

Quite simply, lower volatility (or greater consistency)! The value of the stocks in the AMF portfolio did not decline as much in down markets.

You see, when an investor regularly withdraws a fixed amount from a portfolio balance that has been reduced in value by a market decline, more shares need to be sold in order to fulfill the with-drawal amount. This leaves fewer shares in the portfolio to participate in any subsequent market recovery.

Factor #3: Control future portfolio risk

A retirement portfolio is usually not the vehicle for trying to achieve “heroic” returns. And as history has shown quite clearly, it’s NOT the average rate of return that determines the success or failure of a retirement savings plan, but the way in which those returns are produced.

At Midwest Investment Management, our objective is to produce returns that are more consistent for our clients, over time, rather than trying to beat every annual market benchmark.

We implement an investment strategy designed to grow a client’s portfolio over time, while controlling the risk normally associated with investing.

The results we have achieved since our firm opened in early 2000 have not only validated our methodology, they have been extremely gratifying (see chart above).

What are the tangible results of our conservative investment discipline?

A $1,000,000 retirement portfolio invested at our firm on March 31, 2000 would have produced a significantly greater return five years later, than if the funds had been invested in stocks representing the Russell Top 200 or S&P 500 Indices, even with adjust-ments for annual with-drawals (see chart at left).

This is not an isolated example–it demonstrates actual results your portfolio could have achieved using Midwest Investment Management’s strategy of focusing on quality, dividend-paying stocks.

We can help you

If your retirement savings portfolio is not managed by Midwest Investment Management, it may lack the “growth-with-low-risk” orientation you’ll want (and need) for consistent returns in the years ahead.

To implement a retirement savings strategy that will set you on a course to reach your retire-ment goals, simply contact one of the Partners listed on the back page of this newsletter.