(audience applauding) Now our next talk must be the most important one because we have dedicated the most time for this talk of any of the others. Most of the presentations today are 20 to 25 minutes. This one's a full 30, so it must be really good. Dana Ansbach is the founder and CEO of Sensible Money.

She has been named to the top 100 most influential financial advisor list by Investopedia for her contributions to financial literacy. She's been writing on retirement related topics since 2008, including contributions to Market Watch, US News and World Report. She's the author of the lecture series, How to Plan for the Perfect Retirement, and the author of the books, Control Your Retirement Destiny and Social Security Sense, available on Amazon.

She's been practicing as a financial planner since 1995 and really has focused on people in their 50s and 60s when she realized that they needed a different type of planning than those of us who are not quite that experienced at life. And so I present to you, Dana Ansbach.

(audience applauding) - I am not here to tell you the best way to structure your retirement portfolio. There's about as many different ways to structure retirement portfolios as there are people in this room. And a lot of debate about it. And we're gonna hear some of that debate later today, which I am excited to hear.

What I am here to tell you is that when you get to the decumulation phase, that point in time where you have to live off your acorns, it's a different game. The best analogy I've heard is it's like you go out and you play your first nine holes of golf.

You go in, you have lunch, come out of the clubhouse, you go back out, and instead of golf, you're on a hockey rink. Different risks that you're exposed to in retirement. And so, there are ways that you can structure your retirement portfolio and your planning to help mitigate those risks if you decide that that's important to you.

I wanna start off and ask what are the biggest, what factors have the biggest impact on your retirement outcomes? There's a lot of debate about this also. Is it the date you retire? Is it inflation? Is it how much you've saved? Is it your withdrawal rate? Is it the actual investment or portfolio returns?

Well, in order to answer that question, I think you have to take a step back even further and say, well, how do you define outcomes? Is it being able to retire when you want? Is it being able to have the income or lifestyle that you want in retirement? Is it being able to have the security of knowing that that income will be there as long as you live?

Is it being able to know that should you need long-term care or nursing home care later that you have enough assets remaining to cover those costs? There's a lot of different ways that we define outcomes. And what I would love to see more of in our industry and in our discussions around these things is clarity around what's the advice we're talking to in relation to the desired outcome?

So, there's a lot of debate about specific advice, but not necessarily tying it to saying, but if your desired outcome was this, that would be the right advice. And if your desired outcome was that, then that would be a lot of the best advice. So, we see a lot of good things out there and all of them may be right depending on what the desired outcome is.

When we look at the traditional way of defining outcomes for retirement portfolios, it's using this efficient frontier. And along the horizontal axis, you have risk, and along the vertical axis, you have potential returns. And as you start to add stocks to the portfolio, over the past, we can see that our returns have been higher.

The numbers you're seeing at the bottom of the slide come from Dimensional Funds' matrix book. And it's a 37-year time horizon, where they're saying if you had 100% stock portfolio, you would have averaged close to 11%. That is gross of fees, so there have been no investment fees netted out of those numbers.

And they measure risk by one-year downside. So, at the red at the bottom, you can see what is the worst one-year return you would have experienced. Well, if your outcome was to maximize returns over a long period of time, you might say 100% stock portfolio is the way to go.

But if your outcome was, well, I don't know when I might need to use the funds and I wanna have the least risk possible, you might say, well, 100% bonds is the way to go. It really depends on what is your primary outcome. The traditional way of constructing portfolios maps different portfolios on the sufficient frontier and says, well, how do I reduce risk as measured by usually short-term volatility, a quarter or an annual basis?

How do I measure risk and what portfolio maximizes potential return for the least amount of volatility? But as we get into decumulation, it changes. So, here on the left, you see accumulator A, and they have a half a million dollars, and we're gonna follow the arrows up. Their portfolio goes up 20%.

They have $600,000 at the end of the year. The next year, the portfolio goes down 20%, and they have 480,000. Same left-hand graph, accumulator A, looking at the bottom arrows. Those returns happen in exactly the opposite order. So, they start with half a million. The portfolio goes down 20%.

They have 400,000. It goes back up 20%, and they have 480. So, they end up in the same place. But on the right, we have decumulator. Now, they have retired, and they know they need to withdraw $50,000 to support whatever their expenses are in that year of retirement. Maybe it's a delayed Social Security strategy, so they're gonna take 50,000 out of their portfolio this year, but they may be taking less out of their portfolio in later years.

So, they have half a million. Portfolio goes up to 600,000. They take 50 out. They have 550 left. It goes down 20%, and they have 440. But if those returns happen in the opposite order, their half a million goes down to 400. They take out the 50. They have 350 left.

It goes back up, and they have 420. And if you compounded that poor sequence of returns, that undesirable sequence of returns over time, even though the investments had the identical rate of return, you could end up with a scenario where the person has substantially less money left, or even runs out of money a lot sooner.

Now, in the investment world, this debate often turns into the way we frame returns. So, most mutual funds use something called a time-weighted rate of return in the way that they are publishing their portfolio returns, which is the only way they can do it, because they don't know the exact time that you made deposits and took withdrawals.

But internal rate of return will calculate your actual return based on the timing of your withdrawals. And so, when you're comparing returns against published indexes, it often doesn't work the way you think. And returns are not the biggest factor that's gonna determine your success in retirement. The paper I really love on this topic is by Jim Sandage.

This is available on the Social Science Research Network. It's called "Chaos and Retirement Income." And this is a graph he has in it where the orange bars represent 100% stock portfolio. This is from 2000 to 2015, so we're looking at 15 years. There's a 5% initial withdrawal rate, and that withdrawal rate's going up by 3% a year.

Well, that 100% stock portfolio has an average return, no fees, of 6.1% a year. And it runs out of money. He contrasted that with a 100% fixed income portfolio that had a 1.5% annual fee and earned 4.8% as an average return. And after the 15 years, while it also declined in value fairly substantially, there was still principal left.

And the point he makes is that the solutions that work for retirement income, did my mic just go out? Okay, sounded a little different over there. The solutions that work for retirement income are not the same solutions that work when you're in the accumulation phase. He even says that using some of the same tools that you use in accumulation might be dangerous.

So if using the same tools doesn't work, what are the factors that he says are most important? Well, he makes the case that beating the index or beating the market in a negative return is the most important factor. Now, I don't know if that is the only or singular most important factor, but I think it's an interesting perspective.

And when you look at the research, there are portfolio designs that can help minimize the impact of a worst case scenario. So when you look at all of this and you shift to what would be the retirement income efficient frontier, across the horizontal axis, you would have annual consumption.

And across the vertical axis, you would have average remaining assets to pass along. If you wanted to maximize your income, of course, you're gonna reduce the odds that you're gonna pass along as much or have as much left later in life. Now, this is my simplified version of a retirement efficient frontier, but there are many versions out there.

This one is from Wade Pfau. It's from a paper on the Retirement Income Institute. And on the vertical axis, he has average remaining assets. And on the horizontal axis, he's framing it in terms of the percentage chance that you would not meet your desired level of spending. Now, the blue line shows a portfolio that's only stocks and bonds.

And the black line shows a portfolio where you have added fixed income annuities. And the point he's trying to make here is that by adding another asset class, fixed income annuities in this case, you can actually reduce the odds that you're not going to meet your desired level of spending and increase the average amount of assets that you are likely to leave to heirs.

Now, again, I'm not showing this slide to say, "Oh, you should all run out and add income annuities." I am illustrating that there are portfolio designs that can hedge different risks. And in this case, the risk to hedge is the risk that you may outlive your money or the risk that you may not meet your desired level of spending over time.

And so you can consider these strategies in light of the goal. If that's a concern or a goal of yours, a portion of your portfolio can be allocated to help hedge that goal. Now, some additional research by Wade Pfau, which I did email and dialogue with him before, because this is an article he wrote in 2017.

It's a three-part series article, and I wanted to make sure that he still stood by this research. You know, "Has anything changed, and is it okay if I use it?" Because I'm not a researcher. I'm a practitioner. What I do is take this research and figure out, "How do I actually apply it in the real world?" So I do rely on a lot of our speakers here and the research they do, and it's greatly, greatly appreciated.

So in this article, he talks about time segmentation or something called rolling bond ladders. I like to refer to them as rolling income ladders because you wouldn't have to fulfill the bond piece of your portfolio with bonds. You could use CDs. You could use fixed annuities. There's other ways to fulfill it.

Think of it as a rolling income ladder. Now, he compares a traditional, basically 60% stock -- it's 60.8 in this article, 39.2% fixed income allocation -- that you would rebalance automatically every year to that allocation. And he wants to compare that against using bond ladder strategies. And in this case, it was a 10-year bond ladder.

And so at the very bottom, the lighter gray color reframed automatic rolling ladders. Well, let's say you started off with a 10-year bond ladder. I'm going to use a simple analogy. Let's say I have a million dollars. I know I need to take $50,000 a year out, and so I want a bond ladder in place to cover the first 10 years of my withdrawals.

So I'd have a bond or a CD maturing in the amount of $50,000 a year every year for 10 years. That would take up about half a million of my portfolio. The other half a million would be invested in growth, some form of growth portfolio. Well, an automatic rolling ladder would mean now I'm in year nine of retirement.

I spent my $50,000, and I would sell some of my stock portfolio and buy a bond that matures 10 years out. So I would keep rolling my ladder forward. So I always had a 10-year runway ahead of me. Now, the rebalancing with a bond ladder or rolling ladder approach only goes one way.

You're only rebalancing from stocks to bonds versus a traditional rebalancing process. You know, you could rebalance either direction to a static allocation. Well, that automatic rolling ladder was the very worst performing of the two, and he also wanted to see, is there anything magic about the actual bond ladder?

Or if I just rebalanced my portfolio to the same allocation that would have resulted if I did the bond ladder, what difference does that make? And so with the automatic rolling bond ladder, it performed worse than if you just rebalanced. And that makes sense because we're forcing to sell stocks, right?

We're only going from stocks to bonds, even at times where normally you would be rebalancing the other way. So then you get into the teal, the next color up, and it was a market-based rolling ladder, meaning I would only extend from stocks to bonds if the portfolio had a positive return or had exceeded a certain threshold amount.

And so the market-based portfolio, you know, did better than the equivalent matching total return. A little bit better, not substantially better. Then we get into the set of dashed gray lines that's just under the yellow, and that was your traditional 60/40, and it did pretty good, right? Just rebalance every year, 60/40.

You know, that's not bad, especially when you look at the 30-year mark. That strategy works pretty well. And if you're a do-it-yourselfer, it's easy to implement, and over time, it's pretty effective. So that's pretty nice to see in this research. And then you have the personalized rolling ladders, which says I'm gonna build this income ladder and benchmark it against my personal glide path, and I'll show you what that looks like in a minute, but it's basically measuring every year how much do you have to have remaining to know that your portfolio will last for life, and there's a personal calculation.

And a personalized rolling ladder says, well, you're gonna extend that every year based on your personal plan. There's no automatic. It's not necessarily based on what the market's doing. If you're ahead of your personal benchmark, you extend your ladder. And that had the highest probability of success, especially as you get out into longer time frames.

But Wade wanted to know why. So if I just rebalanced to that same allocation, and what actually happens in this personalized ladder is if you had a poor series of returns, you actually end up with a slightly higher stock allocation as you go forward. And so if you had just rebalanced to those same allocations, you would have had the same result.

So there's nothing magic about actually having the bond ladder in place. There's a lot of behavioral aspects that are talked about, which I personally agree with. I think behaviorally, it's very easy for people to understand what we call a paycheck replacement portion of their portfolio versus a growth portfolio.

It makes it much easier for them to stick with their portfolios. But he does make the case in the article, without that bond ladder or planning process that goes with it, it would be really hard to have known what to rebalance to, because it wasn't a static allocation. It was an allocation that was specifically driven from a personal benchmark and a personal plan.

And so again, I use this just to illustrate that there are certain portfolio strategies when it comes to the decumulation phase that can increase your probability of success. So when I think of the keys to great outcomes, it's planning, and then it's aligning your portfolio methodology to that specific plan.

Now, when I talk about planning, this is an example of planning out cashflow by account. In this scenario, in section A, you see Social Security income beginning in two years because the oldest spouse is currently 68, and they're waiting until 70 for them to start Social Security. And you see that Social Security go up because when the other spouse later claims, it takes several years.

There's about a six-year age difference between the two. Then you see section B, which are withdrawals by account type. You see the total at the top. They have about $2.6 million in assets. And we'll talk a little bit more about how those withdrawals by account type were derived. Section C, unspent withdrawals.

Well, when you use software to project this, if I took $100 out of the IRA more than I actually needed to consume that year, the software has to do something with that $100. So column C is just a catch-all. It's if I actually withdrew a little bit more money than I needed from a tax-deferred account, it's got to put that money somewhere.

And D says, well, here's our total cashflow available to retirement. Notice that it's going up over time. That's because of inflation. So when I talk about thorough planning, you have to customize the assumptions to you. And so here we carried section D over, and we're going to outline where it's going.

We've got housing expenses, no mortgage, so that's just property taxes and insurance. Living expenses are inflating at 3%, but they're slowing down to an inflation rate of 2%, about a decade into the plan. Because when we look at actual retiree spending habits, there are the go-go years, the slow-go years, and then what are referred to as the no-go years.

And spending does slow down. And you can reflect that in the types of assumptions that you use. Medical expenses are using a 5% inflation rate, and we also have a specific column for big-ticket items, which is referring to auto purchases. And we find that the frequency of auto purchases slows down as people enter their later retirement years, but we do need to account for that.

And then you'll see their monthly after-tax, after-big-ticket is what most people want to know. You know, what do I have to spend each month? You know, after-car purchases and after taxes are paid. And that is going up based on the customized inflation assumptions. And then over on the right, if the portfolio averages a 5% return throughout retirement, it's charting out what are the average remaining assets, or what are the expected remaining assets after all of the withdrawals have been taken.

Well, if you've done this kind of planning, then you can customize your portfolio methodology to your plan. So when we look at these specific withdrawals, I'm going to spend down that non-retirement account first. And in the background, there's Roth conversions happening in the first three years. Wade's going to talk about that in a few sessions.

But if you've tax-optimized the withdrawals, and you've said, well, here's the most tax-efficient way for me to withdraw, then the withdrawal pattern can help dictate the allocation of that specific account. And what I still see a lot of people that will have each account balanced 60/40, for example, or 70/30.

But in this case, if I'm never going to touch Sam's Roth, I'd probably have it 100% invested in equity. And if I'm going to use all of my non-retirement account in the first seven years, I'm probably going to ladder it into CDs or Treasury bills and have none of it in equities.

And then the two IRA accounts are likely going to be a little bit more balanced. But having that personalized plan allows you to, as I describe it, create a job description for each account. And then you're matching the allocation design of that account to its specific job description, defined as what are the cash flows it needs to produce for you.

Now, if I wanted to add an income annuity in, then I might look at Sally's IRA and say, wow, I take out on a minimum $30,000 a year. So maybe if I were going to place an income annuity into this portfolio, I would do it within Sally's IRA because I'm not changing the tax consequences of the portfolio.

I've already optimized my withdrawals based on that. So I might run out and say, well, how much of Sally's IRA would it take if I wanted to generate a guaranteed $30,000 a year and add that into my retirement portfolio? If I wanted to use an income ladder, a personalized income ladder, this would lay out the cash flows that I would need to build in each account and help me decide how much should be allocated to that.

So a little more deep dive on the income ladder, which I am a fan of. I am a little biased when it comes to that. But that's because I don't have the luxury of saying, well, I'll just do it any other way. When you're running a firm and have a fiduciary responsibility, you look at, well, I need this money to last for the rest of someone's life.

And if I'm responsible, I want to do it in a way that gives them the highest probability of success, at least based on what the research shows today. So you think of your income ladder as predictable cash flow paired with a growth bucket. And there has to be a process to say, well, when that growth bucket is-- I like to think of it as overflowing, then when do I refill my income ladder?

And Wade talked about some of the different ways to do that. One of them was his personalized rolling ladder. And that is based on the work of asset dedication, which he references in his article. This is a personalized plan where the dashed white lines represent what's called the critical path, the minimum amount of assets this person needs to have remaining for their plan to work for life.

Now, it might not be the desired plan, although some people do come in and say, I want to die with a dollar in the bank. How can you make it so my last check bounces? I'm like, well, it's a little hard to do because I don't know how long you're going to live.

But most people don't really want that. They do want some assets remaining. But the yellow line tracks their actual portfolio against that path. And when the yellow line is ahead of the dashed white line, then you would extend your income ladder. Now, Wade, in our dialogue, said he's been playing around with a simpler way to do this, where you could just track it against your starting value.

So whenever your portfolio exceeded your starting portfolio value, you would extend the income ladder. And so this would be a way you could implement that kind of strategy on your own. And I'm hopeful he'll come out with that research pretty soon and show us how it looks. So we've talked about the fixed income side, adding income annuities or bond ladders.

But what about the equity side? Well, traditionally, we use something like the economy car on the bottom, which is a risk-adjusted return portfolio built on the efficient frontier. Probably gets good gas mileage. It's going to get us around. It can hold a reasonable number of people. Or we could go for the sports car.

Like, who cares about speeding tickets? I just want to go, right? We're going to maximize returns. Or we don't hear this talked about as often, but what would an all-weather portfolio look like? And so we could design a portfolio to maximize the minimum gain or to maximize the outcome in a worst-case scenario.

Meaning if I got a worst-case decade in equities, what would have held up the best? Am I at time? Five minutes, perfect. I can get through the rest. So I'm using the research of asset dedication from an article published in the Journal of Financial Planning. And here they compare four strategies.

These are just equity strategies. So looking at, you've already decided if you wanted to add income annuities or bond ladders. And now you're looking at, is there a different way to design my equity portfolio? S&P 500 is the benchmark. The red is our sports car. We're just going for it, right?

We're going to maximize returns. The blue is our economy car. We're going to look at risk-adjusted returns. And four is what's referred to as mini-max, which is a concept that comes out of gaming theory and says, well, how do I design a portfolio that's going to hold up the best in a worst-case scenario?

For those who want all of the deep dive research, they use 16 different categories. They pulled all the return data from the Kenneth French Data Library. We'll pass right over that. So here's our results. So we have our S&P. And in a worst-case scenario, there was 40 different time horizons studied.

It took 15 years to get back to zero. Our dashed lines show our average return. And so we see, as we know, the average return for the S&P is about 10%. And the average would study all of the rolling one-year time frames or all of the rolling five-year time frames in those 40 years studied.

Next, we add in maximizing expected return. Now, I can't remember what the allocation of this portfolio was, but it might have been like 100% small cap value. So it would have been something like a one-asset class portfolio. Now, again, it took 15 years for our worst case to get above zero.

15 years is a long time if you're in retirement. But our average return is now much higher. And so if I'm more than 15 years away from retirement and I said, well, that's my goal, that might not be a bad strategy. I myself am still 100% equity. I'm 52 years old.

I think the first year I would even conceive of retirement would be 65, although likely for me it's 70. But what I will do when I'm 55 is I will sell enough of my equity portfolio and I will be buying a bond that matures when I turn 65 for whatever amount I think I might need to withdraw.

And so I will slowly build out my bond ladder by the time I get to 65. Next, we have the maximized Sharpe ratio. This is our economy car. And so here, again, it was 15 years before our worst case scenario rose above zero. But our average return when we got out to about 10, really about 15 years-- actually, our average return the whole time was higher than just the S&P or just our other scenarios.

And last, we have our minimax. And so now our worst case scenario got us back to break even in six years. So half the time, which again, if you're retired, that's a really big difference. The trade-off, though, is the average return is substantially lower than most of the other strategies.

And so there is a trade-off in retirement if you want to build your portfolio to hedge against downside risk. There is no free lunch. We talk about that all the time. But there are strategies that can help hedge different risks. Wrapping up, I think it's really important to decide what the goal is.

If you're still using a portfolio that's going to maximize average returns, you need to understand that in a worst case scenario, that portfolio may not hold up as well. Use planning and portfolio strategies designed to help you achieve your goals, whatever those might be. Some people want to spend as much as possible early in retirement and really do are like, my kids are fine.

Other people, they really want to maximize what they're going to pass along to heirs or do gifting strategies along the way. Evaluate income ladders and annuities in their ability to help you achieve the goal. And evaluate portfolios relative to the goal, not comparing one to the other. What I still see a lot of, and I mentioned this earlier, is comparing returns of one strategy to another.

And what I would love to see more of in retirement, particularly when we're talking about the decumulation space, is thinking of these things in terms of what goals do they help hedge, and is that important to me. And I really think that can help shift the conversation and make so much of what we see out there a little more clear, a little more understandable.

And then we'll be able to put it in its right place in the framework. Back to you, Jim.