Financial Planning Fridays #23: Market Votality Cushion

Today we wanted to discuss one of the key measures of risk that we use at Presilium once clients are retired—how many years their financial plan has as a cushion. How many years can we only use the income and bonds in your investment accounts before we would have to use stock to meet your spending goals? This tells us how long we have for the stock portion of your accounts to grow before you may need to access it.

The probability that stock indexes will be positive increases with the length of time that you hold them. So if your cushion allows you to hold stocks for five, 10, even 15 years, we can tell you how often stocks have been positive for that length of time, the average annual return and the best and worst historical return.

This chart shows what percent of the time the S&P 500 is positive over different rolling periods:

If you hold the S&P 500 index for a long enough period of time, it has been positive 100% of all 12 month periods so far.

Regarding how we calculate our clients’ cushion:

  1. First we look at your annual retirement spending goal in your financial plan.
  2. Next we subtract any income that you will likely have no matter how stocks are performing. These can include social security, pensions, and the dividend income from your stock holdings. For example: if you have a retirement spending goal of $200,000/year and an investment portfolio worth $3 Million the calculation would look something like this:
    a. First we subtract $50,000 for social security and $60,000 from expected annual dividends- this leaves us with $90,000 per year that we need to withdraw from somewhere in your portfolio each year.

If you hold $1 Million in bonds and cash, this would last about 11 years before we would have to begin using stock for your retirement income goal. In other words, your cushion is 11 years. The S&P 500 has been positive about 98% of the time over all 11 year periods with an average return of 9.2% per year. Because of this the risk you are taking during retirement is quite small.

Knowing the amount of years in your cushion can help you to determine your overall investment mix between stocks and bonds and more importantly allow you to sleep at night when the market is volatile.

We are constantly monitoring the cushion our retired clients have at Presilium. Please call us anytime to discuss your calculation. If you are not currently a client, we are happy to calculate your personal cushion and use that to see if your overall plan or investment mix should be updated.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.