Will YOUR Money Last?

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Jim Lorenzen, CFP®, AIF®

6a017c332c5ecb970b01a3fd0c994a970b-320wiWhen I first entered the advisory business in the early 1990s, financial entertainment television was a new phenomenon.  All the tv gurus were being interviewed regularly and talking heads discussed which funds were likely to do best in the coming months.

The ‘baby-boomers’ were in the accumulation mode and the mantra was “buy term and invest the difference”.  Few did it, though.  They acquired their insurance through work and they invested as long as the market when up.  When the inevitable market pull-backs occurred, they often got out and sat on the sidelines as professionals went in to grab the bargains.

The boomers are older now.  Accumulation is no longer the priority; now, it’s safety – and many are avoiding the market altogether.  Understandable, but problematic, when you consider that the stock market is THE all-time heavyweight champion of inflation hedges.

Inflation, of course, measures what things cost; and the market is comprised of all those companies that sell all those things to us.  Those dots are easy to connect, even for me.

Storm Clouds are Gathering

Many people may be blindsided, according to retirement expert Ed Slott, who also happens to be a CPA, and David M. Walker, former U.S. Comptroller General.   As they point out along with author David McKnight in “The Power of Zero”, the bottom line is this:  The Government is in debt and needs money.  Most Americans will once again be caught on the wrong end when the dog wags his tail.\

Demographics and realities tell the story:

  • The boomers were accumulating and Uncle Sam convinced them to put money into their 401(k)s, IRAs, and other tax-deferred accounts. They avoided taxes on the ‘seed’ so Uncle Sam could reap the harvest.  If tax rates never change, no problem; but, with a license to spend, higher taxes seem bound to follow.
  • The Government has been running up debt. Just 7 years ago, the 219-years of accumulated national debt totalled $9 trillion.  Now, it’s over $18 trillion – doubling in 7 years – and there’s more:  The government counts only the current year’s outlay as debt, not the total outstanding obligations.  Don’t you wish you could do that?
  • The boomers will begin drawing on their now-taxable retirement accounts just when Uncle Sam will need more revenue to fund federal obligations. It has to come from somewhere.  Successful people are the ones in the cross-hairs.
  • Uncle Sam is a partner in every boomer’s retirement plan – a partner with the SOLE vote on how much of the plan he gets to take to fund his promises. The boomer-partner has no vote.   A boomer with a $500,000 IRA might have $125,000 in embedded taxes today and could have $250,000 or more in embedded taxes tomorrow – no one knows, but Uncle Sam has the only vote.

So, for many boomers, the issue of longevity risk is very real; and particularly so for their spouses as boomers wrestle with making sure they’re provided for if something should happen to them.

It’s something I’ve witnessed in my own family.  My dad died at 94, but my mom lived to age 99… a full eight years after my dad passed away… and she needed full-time care the entire time he was no longer around.

Industry Responses

Picture from my first industry conference.
Picture from my first industry conference.

When I attended industry conferences in the early days, all the sessions seemed to be about “adding alpha” (manager value-added) and the efficient frontier (risk mitigation).

Today, increasingly, conferences, webinars, and trade publications are addressing the issue of longevity risk and sustainable withdrawal rates.  The academics are running models with back-testing to aid planners and others who serve clients facing these real-world issues.

Traditionally, most advisors counseled clients to use the 4% rule:  Maintain an optimized portfolio mix and withdraw 4% of your initial balance annually, taking cost of living increases each year the market experiences a gain.

The April 2015 issue of the Journal of Financial Planning[1] featured an in-depth study by Wade Pfau, Ph.D, CFA, addressing this issue testing three different strategies:

  1. The SPIA strategy: Buy a joint/100% survivor’s life-only single premium immediate annuity.
  2. Buy a ladder of bonds maturing over the next 30 years.
  3. Buy a ladder of bonds maturing over the next 20 years and purchase a deferred income annuity (DIA) that will continue the same income level and trend in years 21 and beyond.

Dr. Pfau detailed how each strategy had its own advantages and disadvantages, as one would expect since we’ve never seen anything that’s perfect.  For example,

#1 sacrifices some liquidity but also eliminates both market and longevity risk.

#2 can provide inflation protection by laddering TIPS (Treasury inflation-protected securities), however there is no longevity risk protection beyond 30 years.

#3 is actually fairly attractive and seems to provide the highest sustainable withdrawal rate, despite giving up liquidity on about 25% of assets; but, the trade-off is still inflation risk since no company currently offers a DIA that provides inflation protection for the initial payout made in the future.  The planner would have to do some ‘reverse engineering’ to come up with an estimate of what funding would be required to provide an inflation-adjusted initial payment.  The downside is that it might require funding at a level requiring less liquidity than desired or an inaccurate result.

The models I’ve seen in this and other studies would suggest that sustainable withdrawal rates must inherently be conservative to allow for the spending rate to work.  While the three strategies above may support spending rates between 3.65-4.03% in the back-tested models cited, sustainable spending rates for those not willing to give up liquidity, i.e., in traditional investment portfolio, are more likely to be in the 2.35%-3.51% range, the latter being considered aggressive.

While there are a number of sophisticated strategies available to individual investors, they often require abandoning long-held, well-ingrained beliefs in order to achieve the long-term goals that matter.


If you’d like to view my 30-minute webinar, Why Most Retirement Planning Will Probably Fail, you can do so here; our you can go here for more information.

[1] The Costs of Retirement with Different Income Tools, Wade Pfau, Ph.D., CFA, professor of retirement income at The American College.  Published by the Financial Planning Association.


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.

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