Retirement

Overshooting for Lower Volatility!

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Quiz!

What are benefits of overshooting your target investments (the amount needed to retire)? (Multiple correct answers.)

  1. You get to retire earlier.
  2. You enjoy a choice of shorter or shallower declines from your target, but not both.
  3. You enjoy both shorter and shallower declines from your target.
  4. You enjoy seeing your portfolio fluctuate less.
  5. You enjoy high average growth throughout retirement.
  6. You enjoy growing income during retirement.
  7. You enjoy spending more throughout your lifetime.

Overshooting for Lower Volatility!

You may think of a target investment size needed for financial independence, at which point you can transition to protecting what you have, shifting to investments with lower growth in order to reduce volatility.

What if you could reach lower volatility without sacrificing growth? This is possible by overshooting your target.

Let’s take an extreme example: Say you grow your investments by an extra 100% beyond the target needed to generate passive income for live. Benefits:

  1. Any decline smaller than 50% would keep you above the target for financial independence! Most globally diversified stock investments rarely decline by more than 50% and the time spent below that level is typically a fraction of the overall decline. By overshooting by 100%, you eliminated the bulk of declines below your target.
  1. Any gain beyond that level gives you a choice between (1) higher passive income and (2) an even lower chance of declines below your target, or some combination of the two.

There is no set target for overshooting, and you can decide and revise the decision as you go. The benefit is directly proportional to the size of overshooting.

There is a catch to this plan: It defers the timeline to drawing from the investments for full retirement, something that many people may be unwilling to accept. There are two mitigating points related to this:

  1. In the past 25 years, lifespan has increased significantly, according to this Goldman Sachs article: https://www.gspublishing.com/content/research/en/reports/2025/05/20/2d3fe290-10b1-44be-8d0e-77b8d303928f.pdf. The first chart in page 11 of the article shows a roughly 4-year increase in lifespan since year 2000, and people used these 4 years for extra work, implying an unchanged time in retirement. An extra 4 years of growth and savings makes a huge impact thanks to the overshooting principle.
  1. A modification of the plan above would have two separate targets: (1) covering base expenses that you are not willing to reduce; (2) covering total expenses. The plan would call for overshooting the target for covering base expense. How much you overshoot depends on how much you want to reduce the effective declines below your target vs. how eager you are to retire. During these declines you would scale back the total expenses towards the base expenses. As you reach higher peaks, you can gradually eliminate the scaling back of expenses, and go back to benefit #2 above – splitting the extra gains between higher passive income & higher security.

Quiz Answer:

What are benefits of overshooting your target investments (the amount needed to retire)? (Multiple correct answers.)

  1. You get to retire earlier.
  2. You enjoy a choice of shorter or shallower declines from your target, but not both.
  3. You enjoy both shorter and shallower declines from your target. [Correct Answer]
  4. You enjoy seeing your portfolio fluctuate less.
  5. You enjoy high average growth throughout retirement. [Correct Answer]
  6. You enjoy growing income during retirement. [Correct Answer]
  7. You enjoy spending more throughout your lifetime. [Correct Answer, typically if planned right]

Explanation:

  1. You sacrifice the timeline to retirement, waiting to retire later, in order to overshoot your target investments.
  2. You enjoy both shorter and shallower decline from your target, thanks to the cushion above the target.
  3. You enjoy both shorter and shallower decline from your target, thanks to the cushion above the target.
  4. The portfolio doesn’t become less volatile. But with the elevated baseline the volatility emphasizes more gains related to your target.
  5. By staying allocated for stocks (or other high growth investments), you enjoy potential growth throughout retirement (no guarantees for actual growth).
  6. Whatever reasonable withdrawal rate you can take from your portfolio (whether 3%, 4% or more), the dollar value grows as the portfolio grows.
  7. If you start saving early enough, and don’t have bad luck with a very short retirement, the growing income throughout retirement has the potential for more than making up for the deferred retirement.

Explanations: See article for explanations.

Disclosures

6 Problems with Dividends for Income

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If you own a company with a $1 share price, and it pays a 5c per share dividend, you get 5% in investment income.  While this is a natural solution for retirement income, it has problems.  Some of them stem from the way dividends work:  The share value goes down to 95c (reflecting the cash that the company paid out and no longer has) + you get 5c in cash, leaving you with an unchanged total of $1.  That is, until tax time.  You have to pay taxes on the 5c, reducing the value of your investments.  Below is a list of problems, created by this effect among other factors:

  1. Amount:  More dividends than needed result in unnecessary taxes.
  2. Timing:  The dividend is in cash, not invested, until using the money (called “cash drag”).
  3. Irregularity:  Dividends can be increased or decreased unpredictably – too much creates cash drag & too little creates income stress.
  4. Tax Loss:  If your stock is down, you use dividends for income instead of selling losing shares for income.  Selling losing shares can provide a reduction in taxes.
  5. Limited Growth:  Companies tend to pay dividends when they have limited growth prospects (e.g. utility companies).  Some of the fastest growing companies pay no dividends.
  6. Rebalancing:  By using the dividends for income, you miss out on selling from the biggest gainers in your portfolio to rebalance while generating cash.

Selling from stock investments is far superior:  you can sell from your fast-growing companies, the exact amount needed, when needed, combined with rebalancing & tax-loss harvesting.

Advisors often avoid this optimal solution, since it requires more work and careful planning.  Specifically, it requires setting dividends to reinvest, while carefully planning when to sell to avoid wash sales (i.e. selling at a loss within 30-days of the automatic dividend reinvestment).

Disclosures