Dallas County Living Well Magazine Fall 2014 | Page 38

Don’t Worry (too much) About Outliving Your Money
Courtesy Portfolio Solutions, LLC

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oney is finite while death is permanent.
However, people ages 44 to 75 fear outliving their money more than they fear
death, according to a 2010 survey by
Allianz Life Insurance Co. Out of 3,257
people surveyed, 61% chose running out of money over
death as the more frightening prospect.
Contributing to the heightened worry over going broke
later in life, when most individuals are retired, is our increasing life expectancies. A 2014 National Vital Statistics
report found U.S. life expectancy continues to rise, up 0.4
years from 2008 to 78.5 years in 2009.
Of course, the longer you live, the longer your retirement
and the longer your money needs to last. In financial speak,
the increasing exposure to various investment risks––inflation, market volatility, etc.––as your retirement continues
is known as longevity risk. Some retirees may see that risk
as reason to follow an investment strategy focused solely on
preserving assets.
Although longevity risk should play a role in how you
invest in your later years, investing only to avoid running
out of money may hinder what should be your portfolio’s
primary goal—to maintain a desired standard of living in
retirement.

Your money may need to grow
The fear of outliving your money may make you extremely risk-averse, tempting you to put the majority or all of it in
generally low-risk cash investments. A potential return at a
lower risk than stocks or bonds, what’s not to love?
The historical numbers are not only unattractive, but
rather ugly. According to a 2013 Vanguard report, the
nominal (before inflation) historical average for cash from
1926–2012 was 3.7%. Meanwhile, the historical average
nominal returns for stocks and bonds were 9.9% and 5.5%,
respectively. The median inflation rate from 1950–2012 was
3.1%. Thus, cash investments on average barely returned
more than inflation.
The data shows why stocks and bonds are important components of a long-term portfolio. If your investments have
low potential for growth, then inflation can be the death of
your money.

Not touching your principal is tricky
Some investors may try to live on dividends and interest
payments alone to increase the sustainability of their investments. But, avoiding withdrawals from your principal
by relying on dividends and interest is more of a trick than
strategy. It sounds good on paper, but often doesn’t work in
practice.
Dividends distributed to shareholders come from a company’s earnings. Typically, when a company declares a dividend, its stock drops by the same amount when the market
opens the next day.
For example, you decide to invest $100,000 and buy 1,000

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North Dallas Living Well Magazine • Fall 2014

shares of a stock that sells for $100 per share. The stock
pays a $1-per-share quarterly dividend. In reality, you
would have your initial investment (all else equal) but now
it is $99,000 in stock and $1,000 in cash. Spending the cash
would be the same as spending from your principal.
Instead of relying on a corporation to decide when to
distribute a dividend and by how much, you can generate
the same amount of cash with a strategy known as making
“homemade dividends.” Sell 10 shares of a $100 non-dividend-paying stock, of which you own 1,000 shares, and you
have the same $1,000 as in the scenario above. However,
what you also have is more flexibility over the amount you
receive and when you receive it.
There are also tax implications to consider with dividends. They are subject to double taxation; corporations
pay taxes on earnings, then shareholders pay income taxes
on the dividend payments. Shares sold, on the other hand,
are taxed on their gain.
Additionally, by overweighting your portfolio to dividendpaying stocks you risk sacrificing its diversification. Under
this strategy, you would essentially eliminate all non-dividend-paying stocks from your portfolio, which could hurt
your ability over time to manage risk and boost returns.

Stick with the game plan
Market timing in hopes of avoiding a loss to your investments is like running with an armful of cash from tree to
tree during a storm––eventually lightning will strike. That’s
because successfully jumping in and out of the market is
highly difficult over time, certain Hݙ\