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Accumulation Planning vs. Distribution Planning

Accumulation Planning vs. Distribution Planning

August 19, 2021

Accumulation Planning vs. Distribution Planning

Two very different processes involved here

The Sherpa Guide in Climbing the Mountain vs Descending the Mountain Slope

We have found that most folks who have either the ambition to accumulate wealth or have already accumulated wealth on which to retire are under the impression that the rules for accumulating wealth are similar to if not entirely identical to, the rules when relying on that pile of wealth to produce the necessary distribution of income to fund the retirement stage of life. In mountain climbing one can rely on the same Sherpa Guide to both traverse the upward ascent as well as the downward descent.  The rules of the descent, while often never discovered, are vastly different that the rules of the ascent or accumulation phase in one’s life.

Rate of return, rather steady rate of return is critical in accumulating lasting wealth. Not losing money is about as important as the making of money in the first place—maybe even more critical to the long-term successful accumulation. In fact, to achieve the parabolic trajectory in asset growth that is a natural outcome with sufficient time on one’s side through the power of compound returns one must avoid sustaining deep and projected losses to capital.  Compound growth will take care of itself if the asset base does not take wild swings downward—even if the compound rate of return is most in most people’s estimates.  Having time on your side by starting early along with the prudence to invest wisely can realize satisfactory investment returns without ever having to push the envelope in their accumulation strategy.  In fact, it can be counterproductive to push the envelope, take on excessive risk in the hopes of outsize returns only to sustain near death blows to the portfolio.

With all that said, traversing the downward slope organizing one’s approach to a prudent distribution plan for producing income from assets over what may amount to 3 decades or more—knowing that a couple age 65 has a near 50% likelihood that at least one of them is still alive at age 95) for retirees is not something you do as a mere portfolio asset mix adjustment when you arrive at retirement.  Retiring prudently starts long before retirement, it actually starts when you begin saving and building for retirement. If one relies principally on the all too often leaned upon approach of trying to build a pile big enough to retire on adequately, it is more than a herculean attempt. Many studies on retirement income planning indicate that relying on a portfolio to produce more than 2.8% to 4% income distributions per year from a portfolio composed of stocks and bonds is neither prudent and probably not attainable if you are planning on living an average life expectancy. Failure rates skyrocket if you require your portfolio to produce above these safe distribution rates of 2.8%-4%. Unless you want to leave zero for your children/heirs/missions you’ll have to get comfortable with knowing that the initial withdrawal rate adjusted for inflation as time goes by will mean that there will be before tax is taking out approximately $28,000-40,000 per year of income on which to live off of each year.  Now, for some that accumulates $5,000,000 in portfolio assets that means a $140-200,000 before tax income.  This is going to be a rude awakening for those that have been earning and spending far more than that range during their working years of accumulation.  Show me the person that accumulates $5 million dollars in their portfolio and you will find that their before retirement more likely than not exceeded $500,000 per year as we have experienced.  Too much is lost to non-asset producing consumption justifiable activities out of educating children, dressing for success, caretaking a landscape and a thousand of dining out meals to name just a few. And that is all after Uncle Sam takes its sizable piece of the pie.

So what is one supposed to do? Learning that financial success is more a game of chess, thinking multiple moves ahead, positioning pieces of the portfolio composition is the objective of the game. Knowing how to position pieces can change the outcome of safe distributable income equations to numbers more like 6.5-8% per year. This is a quantum leap.