The Retirement Quadruple Whammy: How to Protect Your Savings

From the day you get your first job, you are encouraged to sign up for the company 401(k), contribute the maximum and take all the free money you can get. Most people take this advice and fund their retirement accounts as an automatic deposit from their paychecks, and they never look back. They are focused on making maximum returns until the day they retire. This is very natural. Even financial planners are guilty of encouraging their clients to “swing for the fences,” and many times they forget to adjust the risk corridor for their clients as they get closer to retirement.

This reminds me of something I experienced back in 2006. I led a group of teens and adults from my church on a backpacking adventure in the mountains of Colorado. The event, accurately named “Wilderness Trek,” involved an exhausting four-day journey to the top of a 14,000 foot mountain. Ironically, it was called, “Mount Hope.” And the hope of every group member was to make it to the summit.

In the 12 months prior to Wilderness Trek, I did my research and started training for how long I believed it would take to climb the mountain. I lost about 50 pounds and I was running five miles a day. To prepare for the process of the climb to the summit, I would often hike with a backpack on, trying to simulate the 40-pound backpack I would be carrying. And as often as I could, I would climb local hills with my backpack.

When the time came for our trip to Colorado, I was in the best shape of my life. I was in such good shape, I actually took some of the weight off other group member’s packs and added it to my own. On the day of the summit, not everyone in our group made it to the top. It was one of the hardest things I have ever done, but I spent a long time preparing for it and made it to the top. I was so proud of myself; I signed the book on the top of Mount Hope. And then, shortly after having this summit experience, I realized the hardest part of the journey still lay ahead. No one told me how hard it would be to climb back DOWN the mountain. I spent all of my time training for the climb UP the mountain, and I didn’t do any training for getting back down. 

During the descent, the leaders of Wilderness Trek shared with us that the majority of injuries don’t happen on the way up, they happen on the way down. And, in fact, I fell several times on the way down. Do you know what happens when you fall and crash while going downhill? It’s much worse than falling while going uphill. Falling downhill increases the speed and intensity of the experience. 

Planning for retirement is very similar. The majority of pre-retirees and financial professionals focus almost solely on the accumulation phase. And they often fail to realize the decumulation phase is often the most difficult and the most important.

America’s IRA expert, Ed Slott, calls this phase of retirement, “The back nine.” In his 2024 book, “The Retirement Savings Time Bomb Ticks Louder” he says, “The ‘Front 9’ is where you position your lead by building up your assets; holding on to your lead – i.e., protecting your assets from excessive taxation – is the ‘Back 9’ where, ultimately, you win or lose.” He has a chapter in the book titled, “Timing is Everything” and it reminds me of the things Dr. Wade Pfau shares in his book, “The Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success.” Dr. Pfau shares several concepts that stress the importance of portfolio decumulation or in other words, coming back down the mountain.

In chapter 2, he talks about some of the retirement risks we face on the way back down. Things like unknown longevity and sequence of returns risk. Regarding this, he says, “Market volatility is further amplified by the growing impact of sequence-of-returns risk in retirement. This is the heightened vulnerability individuals face regarding the investment portfolio returns in the years around their retirement date.” Later in the chapter he says, “The dynamics of sequence risk suggest that a prolonged recessionary environment early in retirement could jeopardize the retirement prospects for a particular cohort of retirees.” In other words, an unknown trip and fall early on in retirement might be more damaging than you realize.

Retirement experts today agree that far too many investors and planners are focused too heavily on the climb up the mountain (the accumulation phase). The greater risks involved with retirement income planning happen later in life. Things like withdrawals, fees, market volatility, housing costs, health care issues, increased medical costs, etc. They suggest more time should be spent focusing on the second half of the game, the decumulation phase.

In the early days of building your portfolio, time is your friend. You can afford to take on more risk. You have time to recover from any market volatility you might face. Once you reach retirement, time becomes an enemy. Things like sequence-of-returns risk can devastate you on the way back down the mountain.

I often talk to my clients about the quadruple whammy they face during the decumulation phase of life, which is when you take distributions from your retirement accounts, while experiencing losses due to market volatility, while paying fees to the adviser who manages the account, and don’t forget about TAXES.

The majority of people planning for retirement have put their money into tax-deferred accounts. These accounts include 401(k)s, IRAs, TSPs, and 403(b)s, among others. That means they are going to owe Uncle Sam a mortgage payment at a rate determined by him, and this will be at a time when they need their money the most. If you take distributions, while experiencing losses, while paying fees and taxes, you will find out just how difficult it is to make your way back down the mountain.

As we age, it’s not as easy to get back up and dust yourself off. Since most retirees are no longer working or earning an income, protecting what you have becomes critically important. That’s why I personally own seven annuities and eight life insurance policies. I’m focused on the second half of the game. I want to protect myself from unnecessary accidents on the way back down the retirement mountain.

My annuities are there to protect my income during the back nine. This isn’t a time to trip and fall. Market volatility at the wrong time during retirement can cause serious injuries. Life insurance is there to negate the loss of income that can arise due to death or the taxes that will be due from tax deferred accounts.

In 2024, annuity rates are at near all-time highs. You can have your cake and eat it, too. You can protect what you spent the past 30 years earning and you can guarantee yourself a paycheck for the rest of your life. The first part of your life was focused on earning money. The second part of your life is the fun part, spending it. Don’t risk running out of money before you make it to the end of the game. Remember, it’s not what you make, it’s what you keep that counts.