Wealthtrack : The New Retirement Reality

[walkinwood]

Consuela Mack's Wealth Track has a two-part series on "The New Retirement Reality". The first part aired 11/5/2010. Mary Beth Franklin and Mark Cortazzo (a financial adviser) are the guests.
Consuelo Mack WealthTrack - Home - The Right Track To Your Financial Health

While you may not agree with everything said (I know I did not), I thought it was a pretty good segment.

It starts with the usual gnashing of teeth about the baby boomers being ill-prepared for retirement, how they shouldn't feel bad about working a few years longer, and the awful impact of the stock market downturn & low interest rates.

Other points.

• Cortazzo sees a dramatic drop in people's ability to make a big financial changes.
• Franklin sees a lot of "victims of recency"
• The "4% rule of thumb" is dead for a 50/50 portfolio. Cortazzo says it is because of low current bond yields. (I don't buy this)
• Pay a fee for protection. Indexed CDs, shorts, annuities etc.
• 3 levers for pre-retirees. Saving rate, time of retirement/starting SS, and asset allocation.
• Biggest risk for retirees is health care costs. Get long term care policies with long waiting periods - 6mo-1yr - to reduce premiums. Self insure front end expenses, but get catastrophic insurance.

The most interesting point to me was Corazzo saying that you can get a variable annuity that gives you the same initial (floor) payout as an immediate annuity (Around 17:30 into the show). He says that "a lot of the bad rap (for VAs) is justified, and he wouldn't recommend 85-90% of the VAs out there.

 

[Onward]

I caught the show twice this past weekend and thought it was very worthwhile.

I didn't like her assertion that we should all be content to retire later, just because life expectancies have increased.

 

[Bestwifeever]

WIW, your summary of the program is really valuable. Thanks.

 

[MasterBlaster]

The "4% rule of thumb" is dead for a 50/50 portfolio. Cortazzo says it is because of low current bond yields. (I don't buy this)

The bond bubble will indeed affect portfolio performance. I agree that all the traditionally accepted rules of portfolio composition are in jeopardy.

be skeptical with traditional rules in this market.

 

[keegs]

I watched the show too but didn't have the ambition to provide such a review. Thanks..

 

[haha]

The "4% rule of thumb" is dead for a 50/50 portfolio. Cortazzo says it is because of low current bond yields. (I don't buy this)

Could you say on what basis you reject this? Ten year bond yields today are less than 3%, so a 50:50 portfolio will get a bit less than 1.5% nominal here. That leaves 2.5% needed from the equity half of the portfolio, just to cover the current withdrawal, to say nothing of growth.

Ha

 

[walkinwood]

Could you say on what basis you reject this? Ten year bond yields today are less than 3%, so a 50:50 portfolio will get a bit less than 1.5% nominal here. That leaves 2.5% needed from the equity half of the portfolio, just to cover the current withdrawal, to say nothing of growth.

Ha

First, I think the 4% "rule" is a "rule of thumb". Anyone with an iota of intelligence will not follow the rule blindly.

Secondly, to date, the 4% rule of thumb has held up just fine. To make forward projections is a judgment call & in my humble opinion, we're not in worse economic shape than the Great Depression or the Stagflation 70s.

We also have access to TIPs, international equity & bond indexes that were not part of the initial 4% studies. There is no reason to limit your bond portion to just nominal bonds.

Based on the above, I think the 4% rule of thumb will continue to work for a 50/50 portfolio that includes international equities, TIPS in the AA. I am not yet comfortable with international bonds or commodities in my portfolio, but that may just be because I haven't studied them much.

 

[haha]

First, I think the 4% "rule" is a "rule of thumb". Anyone with an iota of intelligence will not follow the rule blindly.

Secondly, to date, the 4% rule of thumb has held up just fine. To make forward projections is a judgment call & in my humble opinion, we're not in worse economic shape than the Great Depression or the Stagflation 70s.

We also have access to TIPs, international equity & bond indexes that were not part of the initial 4% studies. There is no reason to limit your bond portion to just nominal bonds.

Based on the above, I think the 4% rule of thumb will continue to work for a 50/50 portfolio that includes international equities, TIPS in the AA. I am not yet comfortable with international bonds or commodities in my portfolio, but that may just be because I haven't studied them much.

Thnx for your reasoning.

 

[chinaco]

Could you say on what basis you reject this? Ten year bond yields today are less than 3%, so a 50:50 portfolio will get a bit less than 1.5% nominal here. That leaves 2.5% needed from the equity half of the portfolio, just to cover the current withdrawal, to say nothing of growth.

Ha

Here is JP Morgan's long-term Capital Market Outlook for the next 10 - 15 years.

Of course, as they look into the crystal ball... like the weather it is subject to change.

http://www.jpmorgan.com/cm/cs?pagename=JPM/DirectDoc&urlname=journey/1q10/longtermcapitalmarkets

They predict average long-term inflation to be similar to the past. The returns are similar to what we have been hearing from other sources.

if this is correct a 50/50 portfolio mix of Domestic Stocks and LT Bonds would be a nominal return of about 5.6% nominal and a real return of about 2.4%.

It is interesting to note that TIPs are projected at a 5% return which is about 1.7% above inflation.

The 50/50 allocation of Domestic Stocks and LT Bonds (according to their projection) would appear to yield about .6 to .7 % over TIPS . That is not much of an increased return to accept the volatility (for domestic securities).


It shows the higher growth in Emerging Markets (no news there).


Blend it however you want... according to this illustration the 10% long-term average return for long stock is not in the picture... even in emerging markets.

 

[keegs]

Thanks for that last post.

Nothing more about energy in their mix?

I'm not sure why higher prices, renewables, supply and geo-politcal dynamics, global warming and environment... aren't seen as significant market issues and with global competition heating up, why pro-labor policies are.

 

[walkinwood]

Thanks for posting that Ha.

I'd be interested in seeing the same report from 1999 and 2006. I wonder what they were projecting in those years.

I was very surprised to read this in their report (I bolded the relevant part). The rhetoric of the last few months argues against it.

"We expect further government stimulus on top of the massive doses already dispensed, additional Treasury debt issuance, more government involvement, a likely pro-labor policy shift, rising commodity prices given emerging market demand and a greater tolerance for inflation in the pursuit of economic growth."

 

[walkinwood]

Here's an article that says we can only expect 2.1% real return from a 60/40 portfolio.
Market returns mean you need to save more for retirement - MSN Money

 

[M Paquette]

Here's an article that says we can only expect 2.1% real return from a 60/40 portfolio.
Market returns mean you need to save more for retirement - MSN Money

A bit of that looks like what we engineers used to call 'extrapolating from one data point.' I'm not entirely convinced that all stock and bond market returns (not just dividends and interest) will be pinned to the levels the author sees.

That 2.1% real return doesn't appear to include the usual 'risk premium', and the article dances around capital gains. Right now, Bankrate.com shows 5 year CDs returning 2.4-2.6%, and 1 year CDs around 1.35%. Not inflation corrected, of course, as nobody really knows what inflation will be over the next several years. When I see CD rates in a low inflation/deflation environment matching his projections for the next 15 years, I have my doubts about his numbers.

 

[haha]

A bit of that looks like what we engineers used to call 'extrapolating from one data point.' I'm not entirely convinced that all stock and bond market returns (not just dividends and interest) will be pinned to the levels the author sees.

That 2.1% real return doesn't appear to include the usual 'risk premium', and the article dances around capital gains. Right now, Bankrate.com shows 5 year CDs returning 2.4-2.6%, and 1 year CDs around 1.35%. Not inflation corrected, of course, as nobody really knows what inflation will be over the next several years. When I see CD rates in a low inflation/deflation environment matching his projections for the next 15 years, I have my doubts about his numbers.

Remember, diversified equity returns can only come from 3 sources-dividend yields, earnings growth, and multiple expansion. Capital gains are not a separate magic fountain of returns.

Ha

 

[M Paquette]

Remember, diversified equity returns can only come from 3 sources-dividend yields, earnings growth, and multiple expansion. Capital gains are not a separate magic fountain of returns.

Ha

Correct. I should have phrased that better.

Anyway, I'm pretty sure that over the next 15 years we will see earnings growth, which will then appear as a combination of dividend growth and capital gains. Long spans where earnings are flat between endpoints are more of an exception than a rule, and have periods of earnings growth between them. A quick glance at ye olde S&P 500 earnings over the lat 50 years shows some 'flat spots'; 1965 (5.30) to 1971 (5.57), 1979 (14.55) to 1986 (14.43), and 2000 (56.13) to 2009* (59.65). Note that between these flat spots there was some pretty hefty growth.

I'd be very surprised if the last 10 years of 'flat, yet lumpy' earnings (56 to 39 to 88 to 59...) continued on another 15 years. Oh, it's not impossible, but I think that in spite of the doom and gloom crowd, nothing fundamental has changed.