Value Proposition

We created an automated income strategy that requires little, if any, portfolio maintenance. It targets a growing stream of income that is both cost and tax-efficient. For more information on this strategy, please click here.

One of the most important questions people nearing or in retirement ask is: How much can I spend? On the one hand, there is the risk of running out of money. This can be a slippery slope, as portfolio withdrawals in one year are likely to translate into less portfolio income the following year. To maintain the same level of spending with less income, one would need to make a larger withdrawal. Rinse and repeat. Of course, market volatility makes this math even trickier.

On the other hand, many people want to enjoy the fruits of their wealth and not leave too much (anything?!) on the table after they are gone. However, academic research clearly indicates that the fear of running out of money has historically driven retirees to spend too little (e.g., see this paper from Dr. Meir Statman).

There are two primary solutions that individuals and financial professionals have used to determine what level of withdrawal rates might be sensible: 

• Historical simulations: The 4% rule from Bill Bengen, more recently upgraded to the 4.7% rule, essentially tested the levels of withdrawals that would have successfully (not run out of money) navigated retirement historically. Specifically, he set a withdrawal rate as a percentage of the portfolio at the start of the period (e.g., 4.7%), but the dollar amount of the withdrawal was adjusted based on the realized level of inflation in each subsequent year. He (and others) then ran the numbers to see what would have happened when these types of withdrawals were made from balanced portfolios (60/40, 40/60, etc.)  over the last century of historical market data. The goal was to zero in on the highest level of withdrawals that never ran out of money over any 30-year period, and that is how these 4%, 4.7%, and other rules of thumb for withdrawal rates originated.
• Monte Carlo simulations: Knowing that history only tells us what happened, but that other things could happen, many people and tools employed hypothetical simulations. These analyses used random numbers to simulate market performance (called Monte Carlo simulations) and used historical return, volatility, and correlation parameters to make these hypothetical simulations reasonably representative of what could happen. At the same time, it is important to understand inherent issues with Monte Carlo simulations (see Michael Kitces’ article on the topic). Geek’s note: The origin of Monte Carlo simulations is intriguing, as the concept was developed by Stanislaw Ulam, a Polish mathematician, while working on the Manhattan Project.

These concepts applied only to economics regarding portfolio withdrawals. Of course, portfolios are generally not the only source of income. Accordingly, the above analyses must also integrate the math around Social Security and pensions, where applicable.

We have developed a proprietary process that takes a more precise approach to estimating sustainable withdrawal rates.  Our approach integrates current market conditions with actuarial tables and accounts for variables that can get lost in the mix when using historical and Monte Carlo simulations. For example, we integrate:

• Market valuations: We have conducted internal research, but this Michael Kitces’ article sheds light on the impact valuations can have on sustainable withdrawal rates.
• Current level of interest rates: Interest rates are effectively market valuation tools for bonds and other fixed-income investments. All else equal, it should not be surprising that higher interest rates correlate with higher sustainable withdrawal rates.
• Dividends and dividend growth rates: While many academics and practitioners eschew dividends, we believe they possess unique qualities and can embed information. We have written two in-depth articles on this topic (Dividends Are Different and Dividends: Theory and Empirical Evidence).
• Inflation sensitivity: Inflation is a critical variable in retirement planning, as it impacts our investments, income streams, and liabilities (i.e., spending) over our retirement time horizon.
• Longevity expectations: Without doubt, how long we expect to live is another essential input into the retirement planning process. Even if we had a good idea of how long we might live, it is still a guess, and we should construct plans that are robust to variations in these estimates. While many assume living longer is the primary risk, it is worth noting that shorter lifespans can also create risk where income is tied to one person, or premature death create tax issues (e.g., the widow’s tax).

By integrating these variables within a sensible framework, we believe we can better balance your financial security, retirement goals, and legacy objectives. Our ultimate goal is to give you peace of mind and confidence in a financial plan that is both practical and flexible.

We created a strategy we call the Poor Man’s Roth Conversion ^TM. This strategy can help increase income and mitigate the widow’s tax for surviving spouses by (1) concentrating taxable income in the period when both spouses are alive, and (2) effectively converting pre-tax assets (e.g., traditional IRAs) into tax-free death benefits. Despite the “Poor Man’s” label, this strategy is well-suited for those with higher levels of pre-tax assets (or pension decisions). We use the “Poor Man’s” label because this strategy works without the upfront tax bite associated with traditional Roth conversions. Please get in touch if you are interested in learning more about this strategy.