Paycheck Replacement


Managing Money During Retirement is More Difficult

Setting up monthly transfers from your portfolio to your checking is easy. The more difficult part of managing the portfolio comes from two big risks:

  • Running out of money too soon, and
  • Living too frugally (for fear of #1)

The big risks are created by paycheck replacement's twin robbers:

  • Inflation, and
  • Stock market sequence of returns.

Money Management

The Compounding Effect of Inflation Fools Us All
An annual withdrawal of $30,000 at the start of retirement at a 6% withdrawal rate would require a $500,000 portfolio ($500,000 x 6% = $30,000).

Even smart people are fooled by the impact of increasing the starting $30,000 withdrawal by 3% each year for inflation. (The 30th year withdrawal is $72,800.) Withdrawals will total $1,500,000 over 30 years. (A 65-year-old couple has a 25% chance that one partner will live to age 95.)

Compounding escalates total withdrawals to triple the portfolio's value at the start of retirement! A paycheck replacement portfolio needs a significant allocation for growth from stock market investments-'safe' won't get the job done.

Stock Market Sequence of Returns Can Devastate a Portfolio
Investor portfolios in any phase are vulnerable to the market's random gyrations, but portfolios in the distribution phase are especially sensitive to unfortunate timing.

Paycheck replacement withdrawals may start at a favorable time in the market or during a highly unfavorable period. Market simulations for the past 40 years illustrate that concentrated portfolios starting with 6% withdrawal and adjusted for inflation have a 25% chance of going to empty before the 30th year. The effect is created by selling stocks when the price is down.

Compass Paycheck Replacement Strategy
While there is no way to control or predict the sequence of stock market returns. The Compass has designed two tactics to assure that monthly checks can be expected to continue throughout retirement:

Asset-Class Diversification- Institutional portfolios are diversified across ten asset classes, each with imperfect correlation to each other. We're counting on each asset class to rise and fall over the years in its own individual cycle.

The Segmented Portfolio- The assets are mentally segmented into two pots;

  • Monthly Check Pot, with several years of monthly checks ‘locked in' at all times to reliable fixed-income investments, and
  • Growth Pot, stock investments expected to create future transfers to the Monthly Check Pot, but only under the right condition. Selling stocks to fund monthly checks when the prices are down is the condition which creates the risk of a portfolio running out of money. Our strategy is to have several years of funding for monthly checks ‘locked in' at all times, allowing us to wait to sell stocks for transfer only when the market is up.