I've had a free subscription to "Wealth Manager" for several years. Bloomberg sold out so it's become a conduit for Highline Media's aggressive
marketing. However it's a valuable insight into the thinking of financial advisors as explained by the FAs themselves. I'd highly recommend signing up for your own free subscription just to see what the industry is up to, and (unlike many marketers) Highline Media promptly stops the junkmail when you ask them to do so. I usually find at least one interesting article a month and many interesting FA attitudes toward their clients.
This month's jewel is an article questioning the conventional 4% SWR asset-allocation wisdom (stocks, bonds, cash) and proposing an alternative "DIESEL" portfolio of the following indices:
- DFA Small Cap Index,
- MSCI EAFE,
- Goldman Sachs Commodity Index,
- Citigroup Composite Bond Index, and
- 3-month Treasuries.
Raddr's website also contains data indicating that more asset classes improve overall portfolio return & volatility, which may lead to a higher SWR, but the problem is getting enough historical data to "prove" it. Heck, people aren't happy with FIRECalc's 125+ years of data!
I'm going to assume that each DIESEL portfolio asset was equally weighted (about 14%) although the authors don't explicitly state that. Retirees maintain about five months' expenses in cash, and quarterly withdrawals also rebalance the winners back to the intended AA. The study covers a whopping 35 years between 1972-2007.
The authors claim that the portfolio survived a 7% starting rate that was raised each year by 3%. Their logic for 3% was that (1) using the CPI in the 1970s-80s would have quickly bankrupted the 4% SWR crowd as well as the 7% visionaries, and (2) retirees' spending doesn't rise after age 70. ("As long as major medical and long-term care risks are properly insured.") 3% seems like a reasonable compromise to them since it's 75% of the 50-year CPI average.
Here's some other interesting claims:
- "Current actuarial tables are based on stale data that bears little resemblance to today’s actual landscape in terms of the health of older Americans."
- "Not once in my 30 years in the industry has a client cited the CPI as a reason for any increase in cash flow from a portfolio."
- "Implementation of the system requires consolidation of investment assets at one institution."
- "Withdrawals began at 7 percent of beginning value and increased 3 per cent annually with no taxes, fees or transaction costs included."
- "Simplification becomes increasingly important as retirees age and become less interested in the details of their financial processes." followed by
- "Of course, the DIESEL system takes some work: Properly trained staff, with one group assigned to review and calculate the required funds for each DIR and another assigned to making the portfolio changes necessary to generate these funds for the withdrawal account." Real simple.
- "A key component of the process must be ... an accompanying caveat to retirees that, despite historical support for the reliability of the system, significant or sustained portfolio declines may require reduction in monthly withdrawals." and finally
- "But isn’t it worth the effort to give your clients a retirement plan designed for the 21st century?"
OK, everyone, let's get out there and spend!
You go first.