Sym Financial: When Financial “Rules of Thumb” Become Costly

WHEN FINANCIAL “RULES OF THUMB” BECOME COSTLY

Rick Harrison, Principal, Senior Financial Advisor

Frank and Fiona Eff are a bright couple who saved diligently for their retirement years throughout their adult lives. Each is 50 years old, their children have been raised and launched, and each loves their respective job at ABC Corporation. Frank and Fiona plan to stay at their careers another fifteen years before enjoying a retirement filled with family, travel, and giving back to their community. Fortunately, each has a pension plan, and each will enjoy relatively generous Social Security benefits.

Sam and Sally Ess have also enjoyed a wonderful life. Similarly, they are 50 years of age and successfully raised and launched their family. Sam and Sally are aiming for an early retirement to pursue their passion for the outdoors. They intend to spend their retirement years hiking, enjoying our country’s national parks, and volunteering with local wildlife conservancy. While Sam and Sally were also diligent savers, neither can claim pension plan benefits. Their monthly Social Security income, though comparable to the Effs, will not sustain their current standard of living and for that reason they plan to begin withdrawing from their savings accounts shortly after retirement.

It’s possible that both the Ess family and the Effs had some level of professional financial guidance in preparation for their retirement years. It’s also possible that their retirement planning consisted of no more than a hodge-podge of broker advice, Google searches, tips from brothers-in-law, or the “strategy” of dividing an equal percentage of their 401(k) contributions into each available fund. And then there’s luck – or a lack of it.

Because retirement planning is complex, people with and without professional advisors frequently rely on “rules of thumb” when determining asset allocation (what percentage of your wealth you apportion to each investment category, one of the most important variables in planning).

Financial Advisors on the other hand are adept at spotting important variables among their clients, and they know how to respond to them in ways that cookie-cutter approaches miss. We see this with the Eff family and the Ess family. These couples have dramatically different needs. However, advisors who follow “standard” asset allocation guidelines do both of them a disservice.

SYM advisors believe investors should structure asset allocation based on their expected near-term need for cash distributions from the portfolio, not their chronological ages. Simply said, dollars an investor wants to access within seven years could be allocated to less volatile investments such as bonds.

Frank and Fiona Eff know their current cash flow needs are met by their salaries. In retirement, they will look forward to their pensions providing a stable and comfortable base of support – with or without distributions from their investment portfolio. As a result, even during precipitous market swings and unfounded calls for disaster, the Effs can invest more aggressively than peers who do not enjoy these post-retirement income sources.

Conversely, Sam and Sally are better served to place 35% to 50% of their portfolio in lower-risk bonds. Because they are leaving steady jobs for an early retirement, the Esses’ need for access to cash is immediate. Without the safety net of a pension, Sam and Sally will depend upon regular distributions from their investment portfolio to replace their salaries – even when markets are down. It’s been said that the only people who truly lose in a down market are those who sell. At their retirement, if the Esses’ income depends on regular draws from their equity account, they could easily find themselves selling when the markets are not at their best. This wipes out a large percent of their savings, which feels particularly painful because it was avoidable.

Assessing one’s allocation needs is fundamental to SYM’s client service methodology, and when paired with complex strategies around rebalancing and minimizing the tax impact of portfolio gains, this approach increases the likelihood that our clients can enjoy the retirement they strive for.

Wherever you are on the path to retirement, don’t fall into the trap of using overly simplistic rules of thumb for important life decisions. The future will be here faster than you may believe. Appreciate if your situation warrants trusting a professional wealth advisor to help you see the nuances beyond the average.

If you have questions or would like to talk further about asset allocation, your SYM advisory team is here to help.

VISIT US AT WWW.SYM.COM 800.888.7968

Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This is not a recommendation to buy or sell a particular security. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request. SYM-20-65.