Descending Mount Everest

By: Philip "Flip" O'Toole

This past summer, I devoured a book that had long been on my “must-read” list. Jon Krakauer’s Into Thin Air chronicles the fateful spring of 1996 on the world’s tallest mountain, Mount Everest. The true story documents the sudden storm near the summit that claimed the lives of eight climbers and left many of the survivors (including the author) racked with guilt for the rest of their lives. Krakauer and other members of his party accomplished their goal of summiting the world’s tallest peak that spring. Unfortunately, many in his group perished during their descent due to one or two seemingly minor miscalculations. Like most who have paid with their lives trying to traverse the 8,800-meter summit (29,000-feet) of Everest, they died not during their ascent of the summit, but during their descent back toward base camp.

The corollaries between climbing and descending Mount Everest are eerily similar to the mission of climbing and descending the financial mountain of our adult lives. To do it successfully, one needs to maintain even more focus once the descent begins. The rules change as we get higher on the mountain, and it gets later in the day. The strategy we employed early in the day when we are at a lower elevation and full of energy is not the same as the strategy that must be employed as we begin our descent from the highest elevation as the sun begins to set after a long day of climbing. Without a bulletproof plan and relentless adherence to the plan, one runs the risk of not successfully making it to base camp.

For example, “dollar-cost-averaging” is one strategy during the accumulation phase of our financial lives that is truly our friend. As we save and invest on a consistent basis throughout our twenties, thirties, forties and even fifties, price volatility around a favorable long-term average return is welcome as it lowers the overall cost of those investments. Once we hit retirement and flip the switch from the accumulation phase to the distribution phase, price volatility around a favorable long-term average return becomes much less friendly.

You might be able to get us to agree that investing in one passively managed index like the S&P 500 during the 40+ years of one’s accumulation phase of life is a prudent strategy. That certainly may be obvious in hindsight looking back over the past forty years, but there is a big problem with that strategy as one heads into the distribution phase of life. What happens if your “retirement” coincides with the beginning of a bear market? What if the next ten years features a sideways market punctuated by two separate bear markets in the S&P 500, each a 50% decline just five years apart? In other words, what if you arbitrarily happened to retire in March 2000?

What about taxes and inflation? During the accumulation phase of life, most of us accumulate some of our wealth in qualified accounts like 401k’s, 403b’s, Thrift Savings Plans, Pensions and IRA’s. The tax deductions and tax deferrals that we have enjoyed throughout the accumulation phase are much less impactful during the distribution phase as we are likely contributing less to qualified accounts and beginning our taxable withdrawal strategy sometime after age 59 1/12, but no later than age 73 (more about that in a future blog post). Some good questions to ask yourselves are:

• What is our vision of the next 20 to 30 years?

• Does our current strategy create a rising income stream that we cannot outlive and that can outpace inflation over the next 20 to 30 years?

• What is the tax situation on our current tax-deferred accounts and tax-free accounts distribution strategy and is there an opportunity to improve the situation?

• Will we become financially responsible for our parents during the last stages of their lives and what is our current strategy for funding that responsibility?

• What is our current plan to maximize the legacy we leave to the next generation and/or favorite cause?

• When we sat down for our year-end review, were we satisfied with the answers to these questions?

Over the past 70-plus years, over 300 people have died attempting to summit Mount Everest. Most of them met their demise on their way back down the mountain. Similarly, in our personal financial lives, the real work starts as soon as we begin our descent down the financial mountain. And just like descending Mount Everest, even one minor miscalculation can have huge ramifications on the ultimate success of the mission. We believe that the distribution phase presents, by an order of magnitude, more challenges than the accumulation phase. Like a sherpa on Mount Everest, our job is not only to help our clients achieve their dreams, but more importantly, descend safely back down the mountain.