The last “all-time high” in the S&P 500 (2,873) was reached just over six months ago, on January 26. Since then, it’s down about 10% on three separate occasions, with no shortage of “volatility” and plenty of expert explanations for this persistent weakness against incredibly strong economic numbers.

• GDP goes up, unemployment goes down; lower income tax rates, increasing number of job vacancies… The economy is so strong that, since April, it has stabilized on the upside in the face of higher interest rates and a looming trade war. Go figure!

But what impact does this pattern have on you, particularly if you are a retiree or “future future”? Does a flat or lower stock market mean you will be able to increase your portfolio income, or will you have to sell assets to maintain your current withdrawal from your investment accounts? For almost all of you, unfortunately, it is the latter.

I have read that 4%, after inflation, is considered a “safe” portfolio withdrawal rate for most retirees. However, most retirement portfolios produce less than 2% of actual disposable income, so at least one security settlement is required each year to maintain power…

But if the market is up an average of 5% each year, as it has been since the year 2000, that’s all good, right? Forgiveness. The market just doesn’t work that way, and as a result, there is absolutely no question that most of you are not prepared for a scenario even half as grim as many of the realities contained in the last twenty years.

(Keep in mind that it took the NASDAQ Composite Index roughly sixteen years to rise above its 1999 high… even with the mighty “FANG.” All of its gain of more than 60% has come in the last three years, just like in the “worthless” rally from 1998 to 2000).

• The NASDAQ has risen just 3% annually for the past 20 years, including producing less than 1% in spending money.

• Despite the dot-com rally between 1997 and 1999, the S&P 500 lost 4% (including dividends) from late 1997 to late 2002. This translates to an asset flight of almost 5% per year or a loss total capital around 28%. So his million dollar portfolio became $720k, still yielding less than 2% per year of real spending money.
• The ten-year scenario (1997 to 2007) saw a modest 6% gain in the S&P, or growth of only 6% per year, including dividends. This scenario yields a 3.4% annual asset drawdown, or 34% loss…your million is down to $660K, and we’re not in the great recession yet.
• The 6 years from 2007 to 2013 (including the “great recession”) produced a net gain of about 1%, or a growth rate of about 17% per year. This 3.83% annual reduction caused the $660,000 to drop another 25%, leaving a savings of just $495,000.
• The S&P 500 gained about 5% from late 2013 to late 2015, another 5% more, bringing the “egg” down to about $470,000.
• So while the S&P has gained an average of 8% per year since 1998, it has failed to cover a modest 4% withdrawal rate almost every time… that is, in almost all but the last 2, 5 years.
• Since January 2016, the S&P has gained approximately 48%, bringing the original savings back up to about $695,000…30% below what it was 20 years earlier…with a draw.” insurance” of 4%.

So what if the market does just as well (yes sarcasm) for the next 20 years and you choose to pull out sometime during that period?

What if the 4% annual withdrawal rate is an unrealistic barometer of what the average retiree wants (or has to) spend per year? What if you need a new car, or there are health problems/family emergencies… or you just want to see what the rest of the world is like?

These realities poke a huge hole in the 4%/a strategy, particularly if any of them have the audacity to occur when the market is in a correction, as it has been nearly 30% of the time during this 20-year bull market. We won’t even get into the very real possibility of bad investment decisions, particularly in the late stages of rallies…and corrections.

• The market value growth, total return approach (modern portfolio theory) is simply not enough to develop an investment portfolio ready for retirement income…a portfolio that actually grows income and growth. working investment capital, regardless of stock turnover. market.

• In fact, the natural volatility of the stock market should help produce income and capital growth.

So, in my opinion, and I’ve been implementing an alternative strategy both personally and professionally for almost 50 years, the 4% drawdown strategy is pretty much Wall Street disinformation “bullshit”. There is no direct relationship between the growth of the market value of your portfolio and your retirement spending requirements, nothing.

Retirement planning should be income planning first and perhaps investing with growth goals. Investing for the purpose of growth (the stock market, no matter how hidden from view by the packaging) is always more speculative and less productive than investing for income. This is precisely why Wall Street likes to use “total return” analysis rather than simply “return on invested capital.”

Let’s say, for example, that you invested the million-dollar savings from 1998, with retirement in sight, that I referred to earlier, in what I call a “Market Cycle Investment Management” (MCIM) portfolio. The equity portion of an MCIM portfolio includes:

• Individual dividend-paying stocks rated B+ or better by S&P (therefore less speculative) and traded on the New York Stock Exchange. These are called “investment grade value stocks,” and they trade regularly for gains of 10% or less and are reinvested in similar securities that are down at least 20% from one-year highs.
• Also, especially when stock prices are bubbly, closed-end equity funds (CEFs) provide diverse exposure to stocks and levels of return on money for expenses typically above 6%.
• The equity portion of such a portfolio generally returns more than 4%.

The income portion of the MCIM portfolio will be the largest investment “cube” and will contain:

• A diverse assortment of CEFs for income purposes containing corporate and government bonds, notes, and loans; mortgages and other real estate-based securities, preferred stock, senior loans, variable rate securities, etc. Funds, on average, have a history of paying income that spans decades.
• They are also regularly traded for reasonable profit, and are never held past the point at which one year’s interest can be realized in advance. When bank CD rates are less than 2% per year as they are now, a short-term gain of 4% (7-9% reinvested) is not a small thing.

MCIM’s portfolio is allocated and managed in asset form so that the 4% drawdown (and a reserve for short-term contingencies) consumes only about 70% of total revenue. Those are the “stuff” needed to pay the bills, finance vacations, celebrate life’s important milestones, and protect and care for loved ones. You just don’t want to sell assets for essential needs or emergencies, and here’s a fact of investing life Wall Street doesn’t want you to know:

• Stock market gyrations (and interest rate changes) generally have no impact on the income paid for the securities you already own, and falling market values ​​always provide an opportunity to add to positions. .
• Thus reducing your cost basis per share and increasing your return on invested capital. Falling bond prices are a far more important opportunity than similar corrections in stock prices.

An asset allocation of 40% stocks and 60% income (assuming 4% income on the stock side and 7.5% income side) would have produced no less than 6.1% in real spending money, despite two major market crashes that rocked the world during those twenty years. And that would have:

• removed all annual provisions, and
• produced almost $2,000 per month for reinvestment

After 20 years, those 1998 million dollar savings would have turned into approximately $1.515 million and would be generating at least $92,000 in spending money per year…note that these figures do not include net capital gains trade and reinvestment at rates better than 6.1%. So this is, perhaps, the worst case.

So stop chasing that “Holy Grail” of higher market value that your financial advisors want you to adore with every emotional and physical fiber of your financial conscience. Free yourself from the restrictions on your ability to generate income. When you leave your final job, you should be earning almost as much in “base income” (interest and dividends) from your investment portfolios as you were earning in salary…

In some ways, income production is simply not an issue in today’s retirement planning scenarios. 401k plans are not required to provide it; IRAs are generally invested in Wall Street products that are not structured to generate income; financial advisers focus on total return and market value figures. Just ask them to assess their current revenue generation and count the “ums,” “ahs,” and “buts.”

You don’t have to accept this, and you won’t be ready for retirement with a market value or total return approach. Higher market values ​​feed the ego; higher income levels fuel the yacht. What’s in your wallet?