May 14, 2012
But will it last?
A sizable retirement portfolio doesn’t just happen. Building one requires effort, knowledge, and resolve. It typically takes decades of disciplined savings, sensible asset allocation, and the courage to hang in there when markets get dicey.
And even then the work’s not done. Because after amassing a nest egg, the big question looms: How long will it last?
Three factors determine how quickly a nest egg depletes — the rate of return that the portfolio earns, the inflation rate, and the withdrawal rate. An investor can only control the third — how much of the portfolio is sold each year to meet cash flow needs.
The math
Small changes in withdrawal rate have a huge impact on portfolio longevity. The chart below provides a hypothetical example of how long investments may last when withdrawn at different rates. It is based on a diversified portfolio of 40% stocks, 45% bonds and 15% money market securities, with performance and inflation based on historical data since 1971.
Figure 1: How long nest egg will last (years), based on withdrawal rate*
Withdrawing 8, 7 or 6 percent each year quickly exhausts the entire portfolio. In just 12 to 18 years, there’s nothing left. A 5 percent annual draw stretches the nest egg out to about 25 years. And with a conservative 4 percent withdrawal the hypothetical portfolio should outlast even the hardiest retiree, with something left over for the next generation.
This 4 percent withdrawal rate – $40,000 per year per $1 million starting balance – has become a rule of thumb for retirement planning. Like most rules of thumb, it’s a good place to start, but it’s far from foolproof. Because the math can be disrupted or derailed by big market swings, the best retirement cash flow planning considers not just this static balanced portfolio, but a wide range of potential asset allocations and the diverse returns they may deliver over time. The Windham Capital Management portfolio software we use at Osbon Capital lets us do just that. I find it to be an extremely powerful planning tool.
Safe, not sorry
With increasing life expectancies, retirement now lasts thirty or more years for many. As it impossible to predict what markets and inflation will do over such an extended period, we recommend building as large an investment nest egg as possible, and keeping the one controllable variable — withdrawal rate — as low as possible.
If you like to play with numbers you may enjoy this simple withdrawal calculator. Tinker with the variables and see how it affects the life expectancy of your portfolio.
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* Source: American Century Investments
This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.
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Categories: Asset Allocation, Financial Planning
Washington Summit Part Two
I decided to fly to Washington, DC, for one day last week for Bloomberg’s Washington Summit. I went for three reasons: density, depth, and debate. Three Congressmen, three Nobel prize winners, one Cabinet member, and a gaggle of politicos, entrepreneurs, and regulators – all in one place, in one day! There’s no substitute for an onsite question and answer format. I expected some interesting insights from the powerful and influential panelists, and was not disappointed.
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Categories: Investment Strategy
Greenspan on Markets
Going to Washington, DC, which is what I did earlier this week for the Bloomberg Washington Summit, is like going to another galaxy. In the DC solar system, politicians, policy makers, influence peddlers, and appointees seem to orbit around each other, each seeking to exert more gravitational pull than the next.
You could see, for example, the effect of a planetary star like Alan Greenspan, former Federal Reserve Chairman, who can hush a full room simply by walking into it. What did Chairman Greenspan have to say, and why was it important for investors?
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Categories: Investment Strategy
Invest in your kids
529 plans, also known as “qualified tuition plans” have been available since 2001 and are designed to encourage saving for higher education through tax deferral. In my opinion, they are one of the sweetest deals around. It’s no wonder 529s have grown to total more than $144 billion.
Here are some client comments about 529s, and why they use them.
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Categories: Financial Planning
Keep what you make
No one likes to think about how much money goes to the taxman, but there’s no avoiding these thoughts at this time of year.
There are many elaborate ways to reduce tax liabilities. Here’s one simple one that has worked like clockwork for 19 years in a row, with essentially no effort required on the part of investors.
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Categories: ETFs, Taxes and fees
Irony alert: Jim Cramer warns investors to ignore noise
A few weeks back the CNBC web site had a clip from Jim Cramer’s frenetic show Mad Money, titled: “Cramer: Filter out the noise!” Donning noise-cancelling headphones for dramatic effect, the animated market commentator counseled investors not to be scared off by certain negative headlines when evaluating stocks to buy.
When the noisiest voice in investing advises viewers to ignore the noise, is that hypocrisy or just irony?
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Categories: Asset Allocation, ETFs, Indexing/Passive Investing, Investment Strategy
“Average” is anything but
Dow Jones & Company has contributed greatly to the world of business and investing, most notably through its gold standard news outlet, The Wall Street Journal. But in 1896 when the company named its flagship market index the “Dow Jones Industrial Average,” it created a considerable can of worms that is still open and wriggling today.
The problem is a single word, one that sounds innocuous enough: “Average.”
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Categories: Asset Allocation, Indexing/Passive Investing
In ten-year wager, Buffett index leads hedge fund
At the beginning of 2008 Warren Buffett made a very interesting bet. He wagered $1 million (for charity) that a Vanguard index fund that tracks the S&P 500 would outperform a hedge fund of funds assembled by Protégé Partners LLC over a decade timeframe.
With six more years to run on the bet, Buffett’s horse is in the lead. Here’s the four year update.
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Categories: Indexing/Passive Investing
Muppets get no respect
By now, Greg Smith’s resignation letter from Goldman Sachs, delivered via the New York Times op-ed page, ranks high in the pantheon of dramatic stage exits. His message about Goldman culture was straightforward and distressing: “It makes me ill how callously people talk about ripping their clients off.”
I spent 20 years in big Wall Street firms. So did I see what Smith saw?
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Categories: Investment Advisors
Risk: What’s worth worrying about?
You know the feeling. You hear noisy headlines trumpeting the latest Default, Plunge, Scandal, or Imminent Crisis. Your heart rate quickens. You wonder if you’re in danger. You feel, depending on your personality, paralyzed by doubt, or compelled to do something…anything.
That white-knuckle feeling is about investment risk and uncertainty. But what is risk, really? The definition you choose has a big impact on what you should worry about and what you can just ignore.
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Categories: International
Don’t confuse investing and gambling
A friendly discussion about whether markets are efficient can easily turn into a heated debate. There are strong feelings on both sides.
What it all boils down to is whether an investor or money manager can use available information — including earnings reports, economic indicators, financial ratios, historical price patterns, technology claims, analyst ratings, political news, phases of the moon, or anything else — to find securities that are priced “too high” or “too low.” An investor who could systematically find these so-called inefficiencies would easily outperform the markets by buying the underpriced securities and selling them when other investors eventually see their true worth.
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Categories: Indexing/Passive Investing, Investment Strategy
Pimco: If you can’t beat ‘em, join ‘em
Give credit to the active investment management powerhouses. Having watched more than a trillion dollars flow out of mutual funds and into exchange traded funds (ETFs), the largest active mutual fund managers had to do something. Several have taken the leap and joined the ETF party. Pimco’s Bill Gross, the eponymous Bond King, is the latest to embrace the ETF structure. Is his new Total Market Return ETF a good idea for investors?
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Categories: Fixed Income, Indexing/Passive Investing
What’s best for the client?
When you create a wealth management practice from the ground up, as I did in 2005, you must make many choices about how to structure, staff, and operate the business. It’s been a complex process building Osbon Capital, made considerably easier by asking one question over and over: What’s best for the client?
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Categories: Investment Advisors
How often do you check your portfolio?
The answer to this question can tell you a lot about a person. For many, it is “Always!” Constant market checkers mentally recalculate their net worth every few hours and look for minute-by-minute trends to inform their next trades. For others, it is “Never!” Hoping to find bliss in ignorance, never-checkers leave their assets to fend for themselves. I suggest you find a strategy somewhere between these two extremes.
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Categories: Financial Planning, Indexing/Passive Investing, Investment Strategy
Blaming umbrellas for the rain
Can a candidate buy an election? Or can a Super PAC make the purchase for him? All of the media attention on election spending had me wondering if this is a nomination process or simply an auction. But does spending by candidates and PACs actually predict success? And what does this have to do with investing? Here’s what I’ve learned.
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Categories: Financial Planning, Investment Strategy
Charts look ominous, but can we trust them?
My son Max is a superstar in the making at Bloomberg, and therefore has access to the latest market intelligence 24/7. When I got a note from him last week about a potential market disaster looming on the horizon, it gave me a chill.
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Categories: Financial Planning, Investment Strategy
What I write and why I write it
At Osbon Capital, we continuously seek to improve every aspect of the business. Most recently we’ve been reworking our web site to bring our index-only philosophy to the fore and make our extensive library of articles easier to use and peruse.
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Categories: Investment Advisors
Busting the correlation myth
When securities move in the same direction at the same time, that’s called correlation. If all stocks are highly correlated it doesn’t really matter what you own; all stocks rise or fall on the same fickle tide. “Everything moves together,” many complain. This is a common perception these days, but is it supported by the facts? Has over-correlation killed the markets?
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Categories: Asset Allocation, ETFs, Indexing/Passive Investing
Planning over punditry
It’s always a pleasure to read Blackstone Vice Chairman Byron Wien’s annual 10 Surprises list. For breadth, open-mindedness, and contrarian thinking, Byron’s list, published since 1986, can’t be beat. But should you invest your money this way? Is Byron’s list, and those of less talented pundits, a reliable source of investment management guidance? I say no, and here’s why.
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Categories: Financial Planning, Indexing/Passive Investing
The Whole, and the Parts
The investment returns for 2011 are now officially in. It was a good year for many asset classes, like bonds, gold, and domestic stocks. For others, like emerging markets, it was straight down. I am happy to report that the four of the largest index positions at Osbon Capital – DIA, GLD, TIP, and VNQ – had positive returns ranging from 6% to 13%.
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Categories: Asset Allocation, ETFs, Indexing/Passive Investing, Investment Strategy
Five lads a-laughing
It’s been a great investment year for some, awful for others, and mixed for many. Time for a break, I say. As our last piece for 2011 I present my favorite five authors who can just make me laugh.
It’s a diverse lot, but they all have one thing in common; they resist the temptation to take the world and themselves too seriously. They see humor everywhere and share it generously. I hope you enjoy reading them as much as I do. Prepare to laugh early and often.
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Categories: Special Additions
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