Lago Vista Independent School District (LVISD)

 

Saving, Investing, and Personal Finance – Death Spiral or Ascending Helix

What can you do now to reduce your post retirement risks? What is the Death Spiral or Ascending Helix? Answering those questions can help you put your financial life under your control, but it will take time and patience. It all starts with understanding your fate is up to you. This is the one of a series of articles for those new to saving, investing, and personal finance.

In planning for the financial future, you need to decide what you will need later, in order to work backward to determine how much you need to save now to reach that goal. Two of the things you have to consider is what will provide your income after retirement and what risks you are willing to take after retirement.

There are many types of plans. We will cover three types of plans in this article, they are growth plans, draw down plans, and protected principal plans.

Growth plans assume you will be able to cash out investments to provide whenever income is needed at a good return. It makes perfect sense to keep a portion of assets in growth. It might not make sense to count on continued growth to exclusively fund income after retirement. If you don't get the growth you expect, or are forced to sell, you're at the mercy of the market. That is why relying on growth alone to exclusively fund income after retirement is not generally recommended.

Many advisors recommend shifting some assets from growth to income investments as we age. Both draw down plans, and protected principal plans, are types of income investing plans.

Draw down plans let you retire with less principal but with increased risk because you will draw down principal to supplement your interest income. Your annual income consists both of interest, and drawing down principal. Several versions draw down principal and reinvest the interest to make the principal last longer. Drawing down principal is a Death Spiral because resources are depleting, leaving less and less principal to generate income in the next annual cycle. What if you plan for 20 years of withdrawals but live for 30 years, or encounter some large expense? It is possible to outlive your savings.

I call protected principal plans Ascending Helix plans as a mnemonic. Ascending Helix plans allow you to increase income, while reducing risk and increasing principal. Ascending Helix plans never withdraw principal, only partial interest is drawn. Some of the interest is retained and added to the principal. This additional principal can increase interest income for the next cycle.

Let's look at some examples. Let's assume you want to consume the 2010 median US household income of $50,000 annually, and to be conservative, let's assume the interest rates are 3 percent. For simplicity, let's assume there is only one investment, at one rate, with no taxes.

In the draw down plan, you might begin retirement with $700,000 with a 20 year withdrawal rate.

Let's contrast that with the Ascending Helix plan which requires more initial principal but entails less risk.

Think about those numbers! It takes $700,000 vs. $1,800,000 but there is a significant reduction in risk. That is why it is important to prepare now by saving, and investing. Events such as layoffs or injuries can force your situation, and can happen at any time.

If you keep adding to a realistic goal, you will probably eventually reach that goal. Sometimes life events will interfere and you will have a discrepancy or need to change plans. Simply use the facts at hand to make the best plan you can create with the resources you have available going forward.

Do you prefer the Growth, Death Spiral, or Ascending Helix? The choice is up to you. Planning and risk reduction are proven personal finance tools; they are two of many steps in getting to a better point in financial life. It all starts with understanding your fate is up to you.

 


Individual Initiative is not an investment service. The information provided is intended to assist you by providing one of many sets of ideas about savings, investing, and personal finance. You should consult many resources to gather many ideas, then use only the ones that you believe will work best for your specific situation. This website contains a comment area. Comments made are those of the contributor and may not reflect the views of Individual Initiative. All investments include risk, including loss of principal. You should be certain you understand both the risks and benefits of any investment or investment strategy before investing.