Retirement Income Volatility

As part of my Q2 2013 review, I decided to look at the annual Income ratios, which are shown in the table below:

	Wealth Ratio
Year	Income	Savings
Target	0.8	20
2007	3.41	23
2008	-5.47	16.7
2009	-1.38	15.3
2010	1.29	16.6
2011	0.5	17.1
2012	2.02	19.1

Average income ratio: 0.06      Standard deviation: 3.1      Total income: 0.37

For reference, annual income is simply the difference between the year end amounts in our retirement and saving accounts.  So an average income ratio of 0.0 is the minimum which means that my income covered my expenses exactly.  However, I was targeting to grow our savings by a 0.8 ratio every year. 

The most striking number in the analysis is the standard  deviation, which means that 68% of the annual income will be between -3.05 and 3.16.   So I could easily be down 3 times my pre-retirement income or up 3 times my pre-retirement income with equal probability.  That is way too much volatility.

So I've decided that trying to live entirely on investment income is not the strategy for us going forward.  I would like to get to about 70% of our income being stable and depend on the other 30% from investment income.  In other words, 70% of our income would be from low volatility sources and and 30% from the investments.

Low volatility sources that I will investigate include: Social Security, real estate, and annuities.  



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This is not financial advice. Please consult a professional advisor.

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