Why Systematic Distributions are Destined to FailSubmitted by Integras Partners on May 15th, 2017
There is a long-standing practice of assuming that 4% retirement distributions are sustainable throughout retirement. This assumption has been refuted by Nobel Laureate and Stanford professor Bill Sharpe, who said “This rule and its variants finance a constant, non-volatile spending plan using a risky, volatile investment strategy.” The problem doesn’t lie in the math of a percentage withdrawal rate, it lies with the implementation of most advisors.
The faulted paradigm is encouraged at the firm level for compliance protection (often based on 14 risk questions required of clients) and implemented by their employee advisors. The result is retirement portfolios with a typical 60/40 allocation (60% stocks with 40% bonds and cash) and monthly income taken proportionately from across all assets.
The problem with this strategy is two-fold. First, systematic selling both stocks and bonds regardless of market direction. Why should an investor liquidate stable (bond) investments when stocks are going up? Secondly, and more dramatically, why generate 60% of income from stock investments when those markets are falling?
If stocks go down 10% over a given period, this strategy sells more shares at declining prices to provide a set amount of cash to spend. The hit to retirement assets are compounded by the decline and the distributions. The results facing the retiree are worrisome. Are you going to increase your portfolio risk by sustaining your income or spend less? Typically, these outcomes are not envisioned while striving to accumulate retirement assets.
A fee-only financial advisor in Alpharetta, GA takes a healthier approach to retirement income planning. Integras Partners starts layering client portfolios with multiple strategies in preparation for retirement. Each layer is target funded to meet expected withdrawals over graduating timeframes. Each layer has a proprietary investment strategy designed to capture successively greater market returns.
This paradigm separates assets for short-term spending and limits risks to earliest income needs. This provides the time necessary for longer-term investments to capture expected growth.
It also requires more commitment from the advisor, opposed to simply rebalancing a 60/40 model. Chief Investment Officer, Keith Johnson says, “Our clients receive the emotional comfort to continue planned spending during market declines without the concern of being forced to choose between less income or increasing their risk with a higher distribution percentage.”