Can New Research Help You Avoid the Same Fate?
As a young boy, I was very close to my grandparents – to my grandfather especially. I really looked up to him. He had sold his business, a cotton seed oil mill, in 1960 at the age of 53. The sale netted him enough money that he figured he could retire young(ish). That gave him the freedom to spend lots of time with me. Some of my earliest memories are of playing in the tree house he built for me in the yard of their beautiful home. When I was 6 years old (1974), he and my grandmother moved from their nice home into a nice apartment. Losing my tree house was not cool. Several years later, they moved again – this time into a smaller, less nice apartment. By the time I was in high school, my widowed grandmother moved yet again into an even smaller, not-nice-at-all apartment. This was when I learned the ugly truth that their money was all gone. How did this happen? What could have prevented it? Those questions ate at me. It all seemed so unfair. After college, I joined Merrill Lynch as a financial adviser and dedicated my practice to helping retirees avoid my grandparents’ fate.
At Merrill I worked with over 100 retiree clients. Most considered themselves “old” and “rich”. That gave them a false sense of security that they’d never be “old” and “broke” one day. I’d explain to many of them that they weren’t really that old. After all, a 65-year old couple has a joint life expectancy of 23 years. (This means there’s a 50% probability that the surviving spouse will live LONGER than 23 years.) My grandmother passed away 40 years after my grandfather sold the business and retired. That’s enough time for inflation to deplete even a large portfolio without careful planning. Most importantly, I learned that managing portfolios isn’t ultimately about numbers. It’s about the quality of a life. Watching someone you love slowly downgrade their comforts/freedoms/dignity year by year is painful.
Fortunately, there’s a growing body of legitimate academic research that’s helping advisers and their clients make better decisions. One notable eyebrow-raiser is a recent paper published in the Journal of Financial Planning by Jack DeJong, PhD and J.H. Robinson.* Their research suggests that constantly rebalancing your portfolio may do more harm than good. It’s been practically unquestioned dogma that periodic rebalancing to maintain a constant asset allocation is the most efficient way to manage portfolios. This assumption is thus embedded in conventional retirement planning forecasts. DeJong and Robinson, however, contend that investors who depend on their portfolio for income may be better off not rebalancing. One alternative is a “Guardrail Strategy”, in which stocks are not sold after negative return years. An even better option might be a “Bonds/Cash First” withdrawal strategy, in which retirees draw income first from cash and bonds. Both alternatives result in an increasingly unbalanced portfolio, yet may substantially lower your odds of running out of money. The following hypothetical shows how dramatically this simple change can improve your portfolio’s sustainability. Switching to a Bonds/Cash First withdrawal strategy lowers the risk of going broke in retirement from a 65% probability to a mere 3% probability:
Fortunately, DeJong and Robinson have turned the software they used for their research into a tool for advisers and their clients called NestEgg Guru. I’ve licensed the software and made it available so that you can run your own scenarios HERE. It’s super easy to use and literally takes less than a minute to enter your assumptions (confidentially – I don’t see your data). I’ve used it to run a lot of “what ifs” (including the ones in this example above) and have been shocked by some of the results.
Though Dr. DeJong is an academic, Mr. Robinson is a seasoned financial adviser. I salute this combination of theorist and practitioner, since such a pairing can yield real world conclusions that help real world people. Their paper covers a lot of ground; I only touched on the most unique conclusions above. Even if subsequent research finds fault with or reaches different conclusions from DeJong and Robinson’s paper, their work has contributed to our profession’s search for truth. As with medical science, even failed R&D produces learning and thus progress toward ultimate truth. My salute, then, to both of these gentlemen for their contributions.
Please reach out if I can help you or someone you care about design a plan that maximizes their odds of success and minimizes the odds of the fate my grandparents endured.
Yours in the Field,
Frank Byrd, CFA
* DeJong, Jack C., and John H. Robinson. 2017. “Determinants of Retirement Portfolio Sustainability and Their Relative Impacts.” Journal of Financial Planning 30 (4): 54–62.
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