Portfolio Structure in the “Decumulation” Phase


I read an article this morning in The Fiscal Times that said 59% of Americans surveyed by Gallup were worried about the sufficiency of their retirement savings.  Disappearing pension plans and concerns for Social Security have forced a reliance on 401(k)’s, IRA’s and personal savings for retirement security.  This thrusts the investment risk on to the retiree and leaves their nest egg exposed to market downturns during the critical “portfolio decumulation” period, a time when retirement savings must be turned in to an income source.   However, a portfolio designed around the following three coordinated slices will often provide the protection that retirees crave for their investments.

Current Cash Flow ―Every retirement portfolio should have near cash assets sufficient to cover 12 to 24 months of anticipated lifestyle expenses.  Knowing where your near-term cash flow will come from will provide piece of mind during temporary market downturns.  It will also guard against the forced sale of assets when markets are depressed to cover lifestyle needs.  The appropriate number of months reserved will depend on each retiree’s circumstances.

Near Term Cash Flow Needs (Years two through five) – These investments are structured to cover the next two to four years of cash needs.  They typically include a bond ladder with maturities to match each year’s expenses.  In certain circumstances, a high quality short to intermediate term bond mutual fund may be a viable substitute.  The goal is to provide guaranteed cash flow and recovery time should a protracted market decline occur.  Care must be taken not to allocate too much to this slice of the portfolio, as this will impact your ability to grow the portfolio over time.

Long Term Growth and Inflation Protection – This slice of the portfolio is intended to provide increased long term purchasing power through growth in portfolio value.  At Legacy Trust, these assets will typically consist of domestic and international stocks, real assets, MLP’s, long term and high yield bonds and other growth assets.  Since this growth will come with volatility, it would be inappropriate to rely on these assets for near-term cash flow purposes.  However, periodic rebalancing will create cash to replenish the cash flow slices discussed above.  The percentage of the portfolio devoted to growth assets will be a function of cash needs and the investor’s personal risk tolerance.

As you can see, the “portfolio decumulation” stage of investing must come with a change in how you think about your investment resources.  The single purpose asset allocation used during the accumulation phase is no longer appropriate.  Rather, a well-constructed retirement portfolio will be structured to ensure required cash flows, while providing the growth necessary to protect you from inflation.  This structure will provide piece of mind, while you confidently enjoy what you have worked so hard to accumulate.  Legacy Trust would be happy to discuss how the above strategy could be applied to your personal needs.