You may recall the biblical story in Genesis about King Pharaoh and Joseph: Joseph deciphered the king’s dream for the future of Egypt in which God showed the Pharaoh that Egypt would enjoy seven years of plentiful harvest followed by seven years of drought and famine. So King Pharaoh heeded to this prophecy like any good leader. And with the willing help of Joseph, who was appointed as vizier, or prime minister, Egypt was able to store enough food from the fields during the seven years of abundance to withstand the devastation of the seven years that followed.
There is great wisdom in this story that we can, and should, apply to many areas of our lives: when we are given abundance, save for a time of desperation. When it comes to supplying retirement income through investments, it should be no different.
Many retirees count on regular, supplemental income from their IRAs and other assets invested with their advisors. So it’s no surprise that many of these same retirees were pulling money out of their investments at the bottom of the market during the recent recession. For instance, if a retiree’s portfolio was down 40%, it means he/she is pulling this money out at 60 cents on the dollar. Moreover, if this money came from a qualified retirement account it could be taxed as well. This means that if this same retiree was in the 25% tax bracket, he/she would only receive 45 cents on each dollar. In other words, the retiree would not only be taking out principal, but more principal than usual just to suffice his/her current needs. And to add insult to injury, these dollars are no longer invested and in a position to take advantage of a recovery if it occurs.
Part of our recovery strategy at KFS has been to change the number of years of accessible income we keep for each client’s needs. Prior to the downturn, we would position up to three years of income needs in the event of a recession. However, recent economic experience has caused us to take a second look at income needs. Based on historic economic cycles, we believe this number should be up to five years to avoid pulling money out of a down market. No, we don’t mean putting that many years worth of income in cash or non-income producing investments — we still want to do our best to outrun inflation. However, we trade off potentially higher returns in order to utilize investment vehicles that protect the principal.
So…back to King Pharaoh and Joseph. When we are given abundance, save for a time of desperation. I believe now more than ever it is absolutely critical to have an investment process in place that allows you to capture profits in your portfolio to save for a time of desperation. Imagine if you had captured enough profits in your portfolio to get you through today’s market conditions. You wouldn’t have had to worry about taking out your principal. Would you be able to sleep a little better at night if you knew you had enough income for the next 4-5 years or still have the means to give your portfolio a chance to rebound?
This should not be considered individual investment advice. You should review your risk tolerance and investment objectives before making any investment decisions.