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Bogleheads University 501 2023 - Retirement Portfolio Designs with Dana Anspach


Whisper Transcript | Transcript Only Page

00:00:00.000 | (audience applauding)
00:00:03.160 | Now our next talk must be the most important one
00:00:09.920 | because we have dedicated the most time
00:00:12.320 | for this talk of any of the others.
00:00:13.880 | Most of the presentations today are 20 to 25 minutes.
00:00:17.440 | This one's a full 30, so it must be really good.
00:00:21.180 | Dana Ansbach is the founder and CEO of Sensible Money.
00:00:26.920 | She has been named to the top 100 most influential
00:00:30.040 | financial advisor list by Investopedia
00:00:32.480 | for her contributions to financial literacy.
00:00:34.920 | She's been writing on retirement related topics since 2008,
00:00:38.360 | including contributions to Market Watch,
00:00:40.140 | US News and World Report.
00:00:41.920 | She's the author of the lecture series,
00:00:43.480 | How to Plan for the Perfect Retirement,
00:00:46.540 | and the author of the books, Control Your Retirement Destiny
00:00:49.360 | and Social Security Sense, available on Amazon.
00:00:51.520 | She's been practicing as a financial planner since 1995
00:00:55.560 | and really has focused on people in their 50s and 60s
00:00:59.320 | when she realized that they needed
00:01:00.800 | a different type of planning than those of us
00:01:03.280 | who are not quite that experienced at life.
00:01:06.640 | And so I present to you, Dana Ansbach.
00:01:09.800 | (audience applauding)
00:01:12.160 | - I am not here to tell you the best way
00:01:15.040 | to structure your retirement portfolio.
00:01:17.240 | There's about as many different ways
00:01:18.700 | to structure retirement portfolios
00:01:20.400 | as there are people in this room.
00:01:22.760 | And a lot of debate about it.
00:01:24.640 | And we're gonna hear some of that debate later today,
00:01:26.720 | which I am excited to hear.
00:01:28.980 | What I am here to tell you
00:01:30.080 | is that when you get to the decumulation phase,
00:01:32.720 | that point in time where you have to live off your acorns,
00:01:35.720 | it's a different game.
00:01:37.280 | The best analogy I've heard is it's like you go out
00:01:39.760 | and you play your first nine holes of golf.
00:01:42.920 | You go in, you have lunch, come out of the clubhouse,
00:01:45.640 | you go back out, and instead of golf,
00:01:48.080 | you're on a hockey rink.
00:01:49.320 | Different risks that you're exposed to in retirement.
00:01:52.960 | And so, there are ways that you can structure
00:01:55.400 | your retirement portfolio and your planning
00:01:57.480 | to help mitigate those risks
00:01:59.220 | if you decide that that's important to you.
00:02:01.620 | I wanna start off and ask what are the biggest,
00:02:06.520 | what factors have the biggest impact
00:02:09.040 | on your retirement outcomes?
00:02:11.600 | There's a lot of debate about this also.
00:02:13.920 | Is it the date you retire?
00:02:15.880 | Is it inflation?
00:02:17.440 | Is it how much you've saved?
00:02:19.480 | Is it your withdrawal rate?
00:02:21.400 | Is it the actual investment or portfolio returns?
00:02:24.560 | Well, in order to answer that question,
00:02:27.360 | I think you have to take a step back even further
00:02:30.320 | and say, well, how do you define outcomes?
00:02:33.780 | Is it being able to retire when you want?
00:02:37.700 | Is it being able to have the income or lifestyle
00:02:41.200 | that you want in retirement?
00:02:43.240 | Is it being able to have the security of knowing
00:02:45.880 | that that income will be there as long as you live?
00:02:49.800 | Is it being able to know that should you need
00:02:52.040 | long-term care or nursing home care later
00:02:54.360 | that you have enough assets remaining to cover those costs?
00:02:57.720 | There's a lot of different ways that we define outcomes.
00:03:03.220 | And what I would love to see more of in our industry
00:03:06.420 | and in our discussions around these things
00:03:08.640 | is clarity around what's the advice we're talking to
00:03:12.040 | in relation to the desired outcome?
00:03:14.760 | So, there's a lot of debate about specific advice,
00:03:17.360 | but not necessarily tying it to saying,
00:03:19.520 | but if your desired outcome was this,
00:03:21.480 | that would be the right advice.
00:03:22.880 | And if your desired outcome was that,
00:03:24.560 | then that would be a lot of the best advice.
00:03:27.480 | So, we see a lot of good things out there
00:03:29.160 | and all of them may be right
00:03:31.600 | depending on what the desired outcome is.
00:03:34.680 | When we look at the traditional way of defining outcomes
00:03:38.840 | for retirement portfolios,
00:03:40.320 | it's using this efficient frontier.
00:03:43.400 | And along the horizontal axis, you have risk,
00:03:46.040 | and along the vertical axis, you have potential returns.
00:03:49.200 | And as you start to add stocks to the portfolio,
00:03:52.320 | over the past, we can see that our returns have been higher.
00:03:55.960 | The numbers you're seeing at the bottom of the slide
00:03:58.280 | come from Dimensional Funds' matrix book.
00:04:00.920 | And it's a 37-year time horizon,
00:04:03.460 | where they're saying if you had 100% stock portfolio,
00:04:06.440 | you would have averaged close to 11%.
00:04:08.800 | That is gross of fees,
00:04:10.400 | so there have been no investment fees
00:04:12.440 | netted out of those numbers.
00:04:14.120 | And they measure risk by one-year downside.
00:04:16.960 | So, at the red at the bottom,
00:04:18.480 | you can see what is the worst one-year return
00:04:22.440 | you would have experienced.
00:04:24.120 | Well, if your outcome was to maximize returns
00:04:26.520 | over a long period of time,
00:04:27.800 | you might say 100% stock portfolio is the way to go.
00:04:31.120 | But if your outcome was, well,
00:04:32.800 | I don't know when I might need to use the funds
00:04:35.320 | and I wanna have the least risk possible,
00:04:39.440 | you might say, well, 100% bonds is the way to go.
00:04:42.040 | It really depends on what is your primary outcome.
00:04:46.240 | The traditional way of constructing portfolios
00:04:48.840 | maps different portfolios on the sufficient frontier
00:04:52.320 | and says, well, how do I reduce risk
00:04:54.240 | as measured by usually short-term volatility,
00:04:57.160 | a quarter or an annual basis?
00:04:59.400 | How do I measure risk
00:05:01.000 | and what portfolio maximizes potential return
00:05:04.400 | for the least amount of volatility?
00:05:06.620 | But as we get into decumulation, it changes.
00:05:12.440 | So, here on the left, you see accumulator A,
00:05:16.400 | and they have a half a million dollars,
00:05:18.480 | and we're gonna follow the arrows up.
00:05:20.760 | Their portfolio goes up 20%.
00:05:23.600 | They have $600,000 at the end of the year.
00:05:26.540 | The next year, the portfolio goes down 20%,
00:05:29.240 | and they have 480,000.
00:05:31.280 | Same left-hand graph, accumulator A,
00:05:35.520 | looking at the bottom arrows.
00:05:37.000 | Those returns happen in exactly the opposite order.
00:05:40.480 | So, they start with half a million.
00:05:42.040 | The portfolio goes down 20%.
00:05:44.120 | They have 400,000.
00:05:45.560 | It goes back up 20%, and they have 480.
00:05:49.120 | So, they end up in the same place.
00:05:51.680 | But on the right, we have decumulator.
00:05:54.600 | Now, they have retired,
00:05:55.680 | and they know they need to withdraw $50,000
00:05:58.160 | to support whatever their expenses are
00:06:00.680 | in that year of retirement.
00:06:02.160 | Maybe it's a delayed Social Security strategy,
00:06:04.440 | so they're gonna take 50,000 out of their portfolio
00:06:06.960 | this year, but they may be taking less
00:06:09.700 | out of their portfolio in later years.
00:06:12.560 | So, they have half a million.
00:06:13.840 | Portfolio goes up to 600,000.
00:06:16.000 | They take 50 out.
00:06:17.280 | They have 550 left.
00:06:18.400 | It goes down 20%, and they have 440.
00:06:21.120 | But if those returns happen in the opposite order,
00:06:24.340 | their half a million goes down to 400.
00:06:26.600 | They take out the 50.
00:06:27.600 | They have 350 left.
00:06:29.000 | It goes back up, and they have 420.
00:06:32.160 | And if you compounded that poor sequence of returns,
00:06:37.400 | that undesirable sequence of returns over time,
00:06:40.980 | even though the investments
00:06:42.820 | had the identical rate of return,
00:06:46.020 | you could end up with a scenario
00:06:47.540 | where the person has substantially less money left,
00:06:50.560 | or even runs out of money a lot sooner.
00:06:53.720 | Now, in the investment world,
00:06:55.140 | this debate often turns into the way we frame returns.
00:06:58.780 | So, most mutual funds use something
00:07:00.460 | called a time-weighted rate of return
00:07:02.520 | in the way that they are publishing
00:07:04.820 | their portfolio returns,
00:07:06.140 | which is the only way they can do it,
00:07:07.580 | because they don't know the exact time
00:07:09.300 | that you made deposits and took withdrawals.
00:07:12.180 | But internal rate of return
00:07:13.860 | will calculate your actual return
00:07:16.240 | based on the timing of your withdrawals.
00:07:18.780 | And so, when you're comparing returns
00:07:20.660 | against published indexes,
00:07:22.540 | it often doesn't work the way you think.
00:07:24.940 | And returns are not the biggest factor
00:07:27.380 | that's gonna determine your success in retirement.
00:07:30.000 | The paper I really love on this topic is by Jim Sandage.
00:07:35.100 | This is available on the Social Science Research Network.
00:07:38.380 | It's called "Chaos and Retirement Income."
00:07:40.940 | And this is a graph he has in it
00:07:42.660 | where the orange bars represent 100% stock portfolio.
00:07:46.980 | This is from 2000 to 2015, so we're looking at 15 years.
00:07:51.840 | There's a 5% initial withdrawal rate,
00:07:54.840 | and that withdrawal rate's going up by 3% a year.
00:07:58.460 | Well, that 100% stock portfolio
00:08:00.460 | has an average return, no fees, of 6.1% a year.
00:08:04.660 | And it runs out of money.
00:08:05.900 | He contrasted that with a 100% fixed income portfolio
00:08:10.100 | that had a 1.5% annual fee
00:08:12.020 | and earned 4.8% as an average return.
00:08:15.300 | And after the 15 years,
00:08:16.660 | while it also declined in value fairly substantially,
00:08:19.900 | there was still principal left.
00:08:22.860 | And the point he makes is that the solutions
00:08:25.700 | that work for retirement income,
00:08:28.620 | did my mic just go out?
00:08:30.600 | Okay, sounded a little different over there.
00:08:33.100 | The solutions that work for retirement income
00:08:36.380 | are not the same solutions that work
00:08:38.580 | when you're in the accumulation phase.
00:08:40.700 | He even says that using some of the same tools
00:08:42.980 | that you use in accumulation might be dangerous.
00:08:46.340 | So if using the same tools doesn't work,
00:08:50.740 | what are the factors that he says are most important?
00:08:54.060 | Well, he makes the case that beating the index
00:08:56.780 | or beating the market in a negative return
00:08:59.100 | is the most important factor.
00:09:01.180 | Now, I don't know if that is the only
00:09:03.420 | or singular most important factor,
00:09:05.860 | but I think it's an interesting perspective.
00:09:07.980 | And when you look at the research,
00:09:09.500 | there are portfolio designs
00:09:11.740 | that can help minimize the impact of a worst case scenario.
00:09:16.220 | So when you look at all of this
00:09:19.820 | and you shift to what would be
00:09:21.980 | the retirement income efficient frontier,
00:09:25.180 | across the horizontal axis,
00:09:27.020 | you would have annual consumption.
00:09:28.740 | And across the vertical axis,
00:09:30.140 | you would have average remaining assets to pass along.
00:09:34.220 | If you wanted to maximize your income,
00:09:35.860 | of course, you're gonna reduce the odds
00:09:37.660 | that you're gonna pass along as much
00:09:39.060 | or have as much left later in life.
00:09:42.140 | Now, this is my simplified version
00:09:43.980 | of a retirement efficient frontier,
00:09:46.340 | but there are many versions out there.
00:09:48.540 | This one is from Wade Pfau.
00:09:50.660 | It's from a paper on the Retirement Income Institute.
00:09:55.220 | And on the vertical axis, he has average remaining assets.
00:09:58.620 | And on the horizontal axis,
00:10:00.300 | he's framing it in terms of the percentage chance
00:10:03.900 | that you would not meet your desired level of spending.
00:10:08.900 | Now, the blue line shows a portfolio
00:10:11.900 | that's only stocks and bonds.
00:10:14.260 | And the black line shows a portfolio
00:10:16.860 | where you have added fixed income annuities.
00:10:20.540 | And the point he's trying to make here
00:10:22.340 | is that by adding another asset class,
00:10:25.060 | fixed income annuities in this case,
00:10:27.140 | you can actually reduce the odds
00:10:30.540 | that you're not going to meet your desired level of spending
00:10:33.740 | and increase the average amount of assets
00:10:36.940 | that you are likely to leave to heirs.
00:10:40.020 | Now, again, I'm not showing this slide to say,
00:10:42.300 | "Oh, you should all run out and add income annuities."
00:10:45.020 | I am illustrating that there are portfolio designs
00:10:48.860 | that can hedge different risks.
00:10:51.220 | And in this case, the risk to hedge
00:10:53.780 | is the risk that you may outlive your money
00:10:56.860 | or the risk that you may not meet
00:10:58.620 | your desired level of spending over time.
00:11:01.860 | And so you can consider these strategies
00:11:03.980 | in light of the goal.
00:11:05.620 | If that's a concern or a goal of yours,
00:11:08.580 | a portion of your portfolio
00:11:10.180 | can be allocated to help hedge that goal.
00:11:14.060 | Now, some additional research by Wade Pfau,
00:11:16.220 | which I did email and dialogue with him before,
00:11:19.340 | because this is an article he wrote in 2017.
00:11:22.420 | It's a three-part series article,
00:11:23.980 | and I wanted to make sure that he still stood by this research.
00:11:27.100 | You know, "Has anything changed, and is it okay if I use it?"
00:11:29.740 | Because I'm not a researcher. I'm a practitioner.
00:11:32.220 | What I do is take this research and figure out,
00:11:34.340 | "How do I actually apply it in the real world?"
00:11:36.620 | So I do rely on a lot of our speakers here
00:11:39.620 | and the research they do,
00:11:40.660 | and it's greatly, greatly appreciated.
00:11:43.460 | So in this article, he talks about time segmentation
00:11:47.700 | or something called rolling bond ladders.
00:11:50.180 | I like to refer to them as rolling income ladders
00:11:52.260 | because you wouldn't have to fulfill
00:11:54.380 | the bond piece of your portfolio with bonds.
00:11:56.740 | You could use CDs. You could use fixed annuities.
00:11:59.500 | There's other ways to fulfill it.
00:12:01.020 | Think of it as a rolling income ladder.
00:12:03.980 | Now, he compares a traditional, basically 60% stock --
00:12:08.820 | it's 60.8 in this article, 39.2% fixed income allocation --
00:12:15.460 | that you would rebalance automatically
00:12:17.220 | every year to that allocation.
00:12:20.180 | And he wants to compare that against using bond ladder strategies.
00:12:24.580 | And in this case, it was a 10-year bond ladder.
00:12:27.980 | And so at the very bottom, the lighter gray color
00:12:32.900 | reframed automatic rolling ladders.
00:12:35.460 | Well, let's say you started off with a 10-year bond ladder.
00:12:38.620 | I'm going to use a simple analogy.
00:12:39.940 | Let's say I have a million dollars.
00:12:41.500 | I know I need to take $50,000 a year out,
00:12:44.700 | and so I want a bond ladder in place
00:12:47.860 | to cover the first 10 years of my withdrawals.
00:12:50.460 | So I'd have a bond or a CD maturing
00:12:52.340 | in the amount of $50,000 a year every year for 10 years.
00:12:55.740 | That would take up about half a million of my portfolio.
00:12:58.300 | The other half a million would be invested in growth,
00:13:01.060 | some form of growth portfolio.
00:13:03.180 | Well, an automatic rolling ladder would mean
00:13:05.220 | now I'm in year nine of retirement.
00:13:07.620 | I spent my $50,000,
00:13:09.420 | and I would sell some of my stock portfolio
00:13:11.420 | and buy a bond that matures 10 years out.
00:13:13.980 | So I would keep rolling my ladder forward.
00:13:16.140 | So I always had a 10-year runway ahead of me.
00:13:19.420 | Now, the rebalancing with a bond ladder
00:13:22.220 | or rolling ladder approach only goes one way.
00:13:24.580 | You're only rebalancing from stocks to bonds
00:13:27.660 | versus a traditional rebalancing process.
00:13:31.060 | You know, you could rebalance either direction
00:13:33.060 | to a static allocation.
00:13:34.900 | Well, that automatic rolling ladder
00:13:37.540 | was the very worst performing of the two,
00:13:39.740 | and he also wanted to see,
00:13:41.700 | is there anything magic about the actual bond ladder?
00:13:45.220 | Or if I just rebalanced my portfolio
00:13:48.820 | to the same allocation
00:13:52.260 | that would have resulted if I did the bond ladder,
00:13:56.140 | what difference does that make?
00:13:58.460 | And so with the automatic rolling bond ladder,
00:14:01.220 | it performed worse than if you just rebalanced.
00:14:04.660 | And that makes sense
00:14:05.620 | because we're forcing to sell stocks, right?
00:14:08.100 | We're only going from stocks to bonds,
00:14:10.100 | even at times where normally
00:14:12.100 | you would be rebalancing the other way.
00:14:14.740 | So then you get into the teal, the next color up,
00:14:18.460 | and it was a market-based rolling ladder,
00:14:20.220 | meaning I would only extend from stocks to bonds
00:14:23.860 | if the portfolio had a positive return
00:14:26.540 | or had exceeded a certain threshold amount.
00:14:29.940 | And so the market-based portfolio, you know,
00:14:33.100 | did better than the equivalent matching total return.
00:14:36.980 | A little bit better, not substantially better.
00:14:40.500 | Then we get into the set of dashed gray lines
00:14:43.660 | that's just under the yellow,
00:14:45.180 | and that was your traditional 60/40,
00:14:47.340 | and it did pretty good, right?
00:14:49.580 | Just rebalance every year, 60/40.
00:14:53.060 | You know, that's not bad,
00:14:54.460 | especially when you look at the 30-year mark.
00:14:56.860 | That strategy works pretty well.
00:14:58.780 | And if you're a do-it-yourselfer, it's easy to implement,
00:15:02.460 | and over time, it's pretty effective.
00:15:04.700 | So that's pretty nice to see in this research.
00:15:07.980 | And then you have the personalized rolling ladders,
00:15:10.740 | which says I'm gonna build this income ladder
00:15:14.220 | and benchmark it against my personal glide path,
00:15:17.660 | and I'll show you what that looks like in a minute,
00:15:19.980 | but it's basically measuring every year
00:15:22.020 | how much do you have to have remaining
00:15:24.020 | to know that your portfolio will last for life,
00:15:26.940 | and there's a personal calculation.
00:15:29.380 | And a personalized rolling ladder says,
00:15:31.300 | well, you're gonna extend that every year
00:15:33.740 | based on your personal plan.
00:15:35.620 | There's no automatic.
00:15:36.900 | It's not necessarily based on what the market's doing.
00:15:39.140 | If you're ahead of your personal benchmark,
00:15:41.740 | you extend your ladder.
00:15:43.620 | And that had the highest probability of success,
00:15:47.380 | especially as you get out into longer time frames.
00:15:50.900 | But Wade wanted to know why.
00:15:54.900 | So if I just rebalanced to that same allocation,
00:15:58.220 | and what actually happens in this personalized ladder
00:16:00.860 | is if you had a poor series of returns,
00:16:03.100 | you actually end up with a slightly higher stock allocation
00:16:05.820 | as you go forward.
00:16:07.460 | And so if you had just rebalanced
00:16:09.260 | to those same allocations,
00:16:11.500 | you would have had the same result.
00:16:13.540 | So there's nothing magic
00:16:15.060 | about actually having the bond ladder in place.
00:16:18.380 | There's a lot of behavioral aspects that are talked about,
00:16:21.740 | which I personally agree with.
00:16:23.300 | I think behaviorally,
00:16:24.660 | it's very easy for people to understand
00:16:26.620 | what we call a paycheck replacement portion
00:16:28.660 | of their portfolio versus a growth portfolio.
00:16:31.260 | It makes it much easier for them
00:16:32.700 | to stick with their portfolios.
00:16:34.380 | But he does make the case in the article,
00:16:36.660 | without that bond ladder
00:16:38.460 | or planning process that goes with it,
00:16:40.820 | it would be really hard to have known what to rebalance to,
00:16:44.860 | because it wasn't a static allocation.
00:16:47.140 | It was an allocation that was specifically driven
00:16:49.900 | from a personal benchmark and a personal plan.
00:16:53.620 | And so again, I use this just to illustrate
00:16:55.980 | that there are certain portfolio strategies
00:16:58.060 | when it comes to the decumulation phase
00:17:00.780 | that can increase your probability of success.
00:17:05.860 | So when I think of the keys to great outcomes,
00:17:08.420 | it's planning,
00:17:10.980 | and then it's aligning your portfolio methodology
00:17:14.340 | to that specific plan.
00:17:16.540 | Now, when I talk about planning,
00:17:17.940 | this is an example of planning out cashflow by account.
00:17:21.140 | In this scenario, in section A,
00:17:23.780 | you see Social Security income beginning in two years
00:17:26.780 | because the oldest spouse is currently 68,
00:17:29.420 | and they're waiting until 70
00:17:31.020 | for them to start Social Security.
00:17:33.740 | And you see that Social Security go up
00:17:35.500 | because when the other spouse later claims,
00:17:38.100 | it takes several years.
00:17:40.020 | There's about a six-year age difference between the two.
00:17:43.300 | Then you see section B,
00:17:44.460 | which are withdrawals by account type.
00:17:48.660 | You see the total at the top.
00:17:50.340 | They have about $2.6 million in assets.
00:17:53.420 | And we'll talk a little bit more
00:17:54.740 | about how those withdrawals by account type were derived.
00:17:58.220 | Section C, unspent withdrawals.
00:18:00.020 | Well, when you use software to project this,
00:18:02.220 | if I took $100 out of the IRA
00:18:05.340 | more than I actually needed to consume that year,
00:18:08.180 | the software has to do something with that $100.
00:18:10.340 | So column C is just a catch-all.
00:18:11.900 | It's if I actually withdrew a little bit more money
00:18:13.940 | than I needed from a tax-deferred account,
00:18:16.260 | it's got to put that money somewhere.
00:18:18.340 | And D says, well,
00:18:19.180 | here's our total cashflow available to retirement.
00:18:21.460 | Notice that it's going up over time.
00:18:24.020 | That's because of inflation.
00:18:26.100 | So when I talk about thorough planning,
00:18:28.460 | you have to customize the assumptions to you.
00:18:32.140 | And so here we carried section D over,
00:18:35.580 | and we're going to outline where it's going.
00:18:37.540 | We've got housing expenses, no mortgage,
00:18:39.980 | so that's just property taxes and insurance.
00:18:42.340 | Living expenses are inflating at 3%,
00:18:45.220 | but they're slowing down to an inflation rate of 2%,
00:18:49.060 | about a decade into the plan.
00:18:51.180 | Because when we look at actual retiree spending habits,
00:18:54.320 | there are the go-go years, the slow-go years,
00:18:56.540 | and then what are referred to as the no-go years.
00:18:58.380 | And spending does slow down.
00:18:59.900 | And you can reflect that in the types of assumptions
00:19:02.260 | that you use.
00:19:03.460 | Medical expenses are using a 5% inflation rate,
00:19:06.180 | and we also have a specific column for big-ticket items,
00:19:09.140 | which is referring to auto purchases.
00:19:11.700 | And we find that the frequency of auto purchases
00:19:13.980 | slows down as people enter their later retirement years,
00:19:18.120 | but we do need to account for that.
00:19:20.060 | And then you'll see their monthly after-tax,
00:19:23.780 | after-big-ticket is what most people want to know.
00:19:27.100 | You know, what do I have to spend each month?
00:19:29.060 | You know, after-car purchases and after taxes are paid.
00:19:32.820 | And that is going up based on the customized inflation
00:19:36.780 | assumptions.
00:19:37.500 | And then over on the right, if the portfolio averages a 5%
00:19:40.900 | return throughout retirement, it's
00:19:42.620 | charting out what are the average remaining assets,
00:19:45.860 | or what are the expected remaining assets
00:19:47.980 | after all of the withdrawals have been taken.
00:19:50.740 | Well, if you've done this kind of planning,
00:19:54.060 | then you can customize your portfolio methodology
00:19:58.180 | to your plan.
00:20:00.100 | So when we look at these specific withdrawals,
00:20:02.260 | I'm going to spend down that non-retirement account first.
00:20:05.540 | And in the background, there's Roth conversions
00:20:07.620 | happening in the first three years.
00:20:09.180 | Wade's going to talk about that in a few sessions.
00:20:12.700 | But if you've tax-optimized the withdrawals, and you've said,
00:20:16.060 | well, here's the most tax-efficient way for me
00:20:18.180 | to withdraw, then the withdrawal pattern
00:20:22.220 | can help dictate the allocation of that specific account.
00:20:25.940 | And what I still see a lot of people
00:20:27.780 | that will have each account balanced 60/40, for example,
00:20:31.140 | or 70/30.
00:20:32.460 | But in this case, if I'm never going to touch Sam's Roth,
00:20:35.580 | I'd probably have it 100% invested in equity.
00:20:38.540 | And if I'm going to use all of my non-retirement account
00:20:40.900 | in the first seven years, I'm probably
00:20:42.740 | going to ladder it into CDs or Treasury bills
00:20:45.220 | and have none of it in equities.
00:20:47.260 | And then the two IRA accounts are likely going to be
00:20:49.740 | a little bit more balanced.
00:20:52.020 | But having that personalized plan
00:20:54.420 | allows you to, as I describe it, create a job description
00:20:57.980 | for each account.
00:20:59.340 | And then you're matching the allocation design
00:21:02.300 | of that account to its specific job description,
00:21:06.140 | defined as what are the cash flows it
00:21:08.100 | needs to produce for you.
00:21:10.140 | Now, if I wanted to add an income annuity in,
00:21:13.140 | then I might look at Sally's IRA and say, wow,
00:21:16.860 | I take out on a minimum $30,000 a year.
00:21:20.420 | So maybe if I were going to place an income annuity
00:21:23.260 | into this portfolio, I would do it within Sally's IRA
00:21:27.060 | because I'm not changing the tax consequences of the portfolio.
00:21:30.620 | I've already optimized my withdrawals based on that.
00:21:33.940 | So I might run out and say, well, how much of Sally's IRA
00:21:37.340 | would it take if I wanted to generate a guaranteed $30,000
00:21:41.180 | a year and add that into my retirement portfolio?
00:21:45.340 | If I wanted to use an income ladder, a personalized income
00:21:48.460 | ladder, this would lay out the cash flows
00:21:50.820 | that I would need to build in each account
00:21:53.540 | and help me decide how much should be allocated to that.
00:21:58.740 | So a little more deep dive on the income ladder,
00:22:01.780 | which I am a fan of.
00:22:03.700 | I am a little biased when it comes to that.
00:22:06.300 | But that's because I don't have the luxury of saying, well,
00:22:11.300 | I'll just do it any other way.
00:22:13.400 | When you're running a firm and have a fiduciary responsibility,
00:22:16.380 | you look at, well, I need this money
00:22:18.300 | to last for the rest of someone's life.
00:22:19.980 | And if I'm responsible, I want to do it
00:22:22.460 | in a way that gives them the highest probability of success,
00:22:26.020 | at least based on what the research shows today.
00:22:29.780 | So you think of your income ladder
00:22:31.520 | as predictable cash flow paired with a growth bucket.
00:22:35.220 | And there has to be a process to say, well,
00:22:37.580 | when that growth bucket is--
00:22:39.100 | I like to think of it as overflowing,
00:22:41.700 | then when do I refill my income ladder?
00:22:44.900 | And Wade talked about some of the different ways to do that.
00:22:49.700 | One of them was his personalized rolling ladder.
00:22:52.260 | And that is based on the work of asset dedication, which
00:22:55.220 | he references in his article.
00:22:57.260 | This is a personalized plan where the dashed white lines
00:23:02.380 | represent what's called the critical path, the minimum
00:23:04.760 | amount of assets this person needs
00:23:06.940 | to have remaining for their plan to work for life.
00:23:09.980 | Now, it might not be the desired plan,
00:23:11.780 | although some people do come in and say,
00:23:13.460 | I want to die with a dollar in the bank.
00:23:15.600 | How can you make it so my last check bounces?
00:23:18.300 | I'm like, well, it's a little hard to do
00:23:20.220 | because I don't know how long you're going to live.
00:23:24.020 | But most people don't really want that.
00:23:25.680 | They do want some assets remaining.
00:23:28.140 | But the yellow line tracks their actual portfolio
00:23:30.580 | against that path.
00:23:31.820 | And when the yellow line is ahead of the dashed white line,
00:23:35.020 | then you would extend your income ladder.
00:23:37.740 | Now, Wade, in our dialogue, said he's
00:23:39.540 | been playing around with a simpler way
00:23:41.220 | to do this, where you could just track it
00:23:43.460 | against your starting value.
00:23:45.500 | So whenever your portfolio exceeded your starting
00:23:48.460 | portfolio value, you would extend the income ladder.
00:23:52.460 | And so this would be a way you could
00:23:54.020 | implement that kind of strategy on your own.
00:23:56.720 | And I'm hopeful he'll come out with that research pretty soon
00:24:00.540 | and show us how it looks.
00:24:04.820 | So we've talked about the fixed income side,
00:24:07.700 | adding income annuities or bond ladders.
00:24:10.500 | But what about the equity side?
00:24:12.900 | Well, traditionally, we use something like the economy car
00:24:17.100 | on the bottom, which is a risk-adjusted return
00:24:19.560 | portfolio built on the efficient frontier.
00:24:22.780 | Probably gets good gas mileage.
00:24:24.380 | It's going to get us around.
00:24:25.540 | It can hold a reasonable number of people.
00:24:28.820 | Or we could go for the sports car.
00:24:30.980 | Like, who cares about speeding tickets?
00:24:32.900 | I just want to go, right?
00:24:34.620 | We're going to maximize returns.
00:24:37.100 | Or we don't hear this talked about as often,
00:24:40.900 | but what would an all-weather portfolio look like?
00:24:44.980 | And so we could design a portfolio
00:24:47.820 | to maximize the minimum gain or to maximize the outcome
00:24:53.900 | in a worst-case scenario.
00:24:55.500 | Meaning if I got a worst-case decade in equities,
00:24:59.500 | what would have held up the best?
00:25:02.420 | Am I at time?
00:25:03.860 | Five minutes, perfect.
00:25:04.820 | I can get through the rest.
00:25:07.260 | So I'm using the research of asset dedication
00:25:10.640 | from an article published in the Journal of Financial Planning.
00:25:14.100 | And here they compare four strategies.
00:25:16.380 | These are just equity strategies.
00:25:18.700 | So looking at, you've already decided
00:25:20.700 | if you wanted to add income annuities or bond ladders.
00:25:23.460 | And now you're looking at, is there a different way
00:25:25.540 | to design my equity portfolio?
00:25:28.140 | S&P 500 is the benchmark.
00:25:30.660 | The red is our sports car.
00:25:32.820 | We're just going for it, right?
00:25:34.060 | We're going to maximize returns.
00:25:35.860 | The blue is our economy car.
00:25:38.780 | We're going to look at risk-adjusted returns.
00:25:40.820 | And four is what's referred to as mini-max, which
00:25:43.600 | is a concept that comes out of gaming theory and says, well,
00:25:46.720 | how do I design a portfolio that's
00:25:48.280 | going to hold up the best in a worst-case scenario?
00:25:50.840 | For those who want all of the deep dive research,
00:25:56.880 | they use 16 different categories.
00:25:58.920 | They pulled all the return data from the Kenneth French Data
00:26:03.760 | Library.
00:26:04.880 | We'll pass right over that.
00:26:06.240 | So here's our results.
00:26:08.720 | So we have our S&P. And in a worst-case scenario,
00:26:13.680 | there was 40 different time horizons studied.
00:26:16.880 | It took 15 years to get back to zero.
00:26:22.120 | Our dashed lines show our average return.
00:26:25.860 | And so we see, as we know, the average return for the S&P
00:26:29.040 | is about 10%.
00:26:32.240 | And the average would study all of the rolling one-year time
00:26:35.920 | frames or all of the rolling five-year time
00:26:38.240 | frames in those 40 years studied.
00:26:42.680 | Next, we add in maximizing expected return.
00:26:48.120 | Now, I can't remember what the allocation of this portfolio
00:26:51.400 | was, but it might have been like 100% small cap value.
00:26:54.880 | So it would have been something like a one-asset class
00:26:58.840 | portfolio.
00:27:01.160 | Now, again, it took 15 years for our worst case to get above zero.
00:27:07.160 | 15 years is a long time if you're in retirement.
00:27:11.320 | But our average return is now much higher.
00:27:14.920 | And so if I'm more than 15 years away from retirement
00:27:17.520 | and I said, well, that's my goal,
00:27:19.120 | that might not be a bad strategy.
00:27:21.360 | I myself am still 100% equity.
00:27:24.560 | I'm 52 years old.
00:27:26.400 | I think the first year I would even conceive of retirement
00:27:29.320 | would be 65, although likely for me it's 70.
00:27:32.600 | But what I will do when I'm 55 is
00:27:35.080 | I will sell enough of my equity portfolio
00:27:38.000 | and I will be buying a bond that matures
00:27:40.120 | when I turn 65 for whatever amount
00:27:43.440 | I think I might need to withdraw.
00:27:45.040 | And so I will slowly build out my bond ladder
00:27:47.880 | by the time I get to 65.
00:27:50.080 | Next, we have the maximized Sharpe ratio.
00:27:55.720 | This is our economy car.
00:27:58.320 | And so here, again, it was 15 years
00:28:01.080 | before our worst case scenario rose above zero.
00:28:05.800 | But our average return when we got out to about 10,
00:28:08.720 | really about 15 years--
00:28:11.000 | actually, our average return the whole time
00:28:13.240 | was higher than just the S&P or just our other scenarios.
00:28:21.000 | And last, we have our minimax.
00:28:24.680 | And so now our worst case scenario
00:28:27.680 | got us back to break even in six years.
00:28:31.800 | So half the time, which again, if you're retired,
00:28:34.520 | that's a really big difference.
00:28:37.320 | The trade-off, though, is the average return
00:28:40.480 | is substantially lower than most of the other strategies.
00:28:45.080 | And so there is a trade-off in retirement
00:28:47.760 | if you want to build your portfolio
00:28:49.760 | to hedge against downside risk.
00:28:52.560 | There is no free lunch.
00:28:53.680 | We talk about that all the time.
00:28:55.400 | But there are strategies that can help hedge different risks.
00:29:00.200 | Wrapping up, I think it's really important
00:29:03.000 | to decide what the goal is.
00:29:06.240 | If you're still using a portfolio that's
00:29:08.600 | going to maximize average returns,
00:29:10.640 | you need to understand that in a worst case scenario,
00:29:13.080 | that portfolio may not hold up as well.
00:29:17.240 | Use planning and portfolio strategies
00:29:20.440 | designed to help you achieve your goals,
00:29:22.560 | whatever those might be.
00:29:24.080 | Some people want to spend as much as possible
00:29:26.240 | early in retirement and really do are like, my kids are fine.
00:29:30.200 | Other people, they really want to maximize
00:29:32.520 | what they're going to pass along to heirs
00:29:34.240 | or do gifting strategies along the way.
00:29:37.200 | Evaluate income ladders and annuities in their ability
00:29:40.520 | to help you achieve the goal.
00:29:42.640 | And evaluate portfolios relative to the goal,
00:29:46.080 | not comparing one to the other.
00:29:49.120 | What I still see a lot of, and I mentioned this earlier,
00:29:53.000 | is comparing returns of one strategy to another.
00:29:56.000 | And what I would love to see more of in retirement,
00:29:59.120 | particularly when we're talking about the decumulation space,
00:30:03.200 | is thinking of these things in terms
00:30:04.920 | of what goals do they help hedge,
00:30:07.880 | and is that important to me.
00:30:10.040 | And I really think that can help shift the conversation
00:30:12.640 | and make so much of what we see out there a little more clear,
00:30:17.240 | a little more understandable.
00:30:18.600 | And then we'll be able to put it in its right place
00:30:21.880 | in the framework.
00:30:25.080 | Back to you, Jim.
00:30:27.080 | [APPLAUSE]
00:30:30.440 | [BLANK_AUDIO]