Ease Clients’ Con­cerns

If his­tory is a guide, your clients can stop freak­ing out about run­ning out of money dur­ing their post-work life.

Financial Planning - - CONTENTS - BY CRAIG ISRAELSEN

If his­tory is a guide, your clients can stop freak­ing out about run­ning out of money dur­ing their post-work life.

I am about to pro­vide you with a his­tor­i­cal anal­y­sis that will help your clients breathe an enor­mous sigh of re­lief about their re­tire­ment port­fo­lios.

Since 1926, there have been 33 dis­tinct “client life­times,” as I call them. By fol­low­ing a sim­ple in­vest­ing strat­egy, all 33 would have been left with mil­lions of dol­lars if they lived to age 95.

Con­sider a client life­time as a 60-year win­dow, start­ing at age 35 when the per­son se­ri­ously be­gins to in­vest for re­tire­ment. The client re­tires at age 70, and then lives to age 95. Thus, this 60-year life­time in­cludes a 35-year pe­riod of ac­cu­mu­la­tion, fol­lowed by a 25-year pe­riod of dis­tri­bu­tions.

Ideally, some peo­ple will be­gin in­vest­ing even ear­lier, and of course, some will live beyond age 95, but for the pur­poses of this anal­y­sis, we as­sume the above pa­ram­e­ters are true. I also base my cal­cu­la­tions for the re­tiree’s dis­tri­bu­tions on the RMD guide­lines, as­sum­ing the re­tiree only with­draws the RMD amount each year and noth­ing more, and that each year’s RMD with­drawal is ad­e­quate for their needs.

The start­ing in­come at age 35 is as­sumed to be a mod­est $50,000, with an in­crease of 1.5% an­nu­ally through age

70. In the ac­cu­mu­la­tion phase, the client saves 8% of their an­nual in­come ev­ery year and in­vests it in a 60% eq­uity, 40% fixed-in­come port­fo­lio. More specif­i­cally, the port­fo­lio — which is re­bal­anced an­nu­ally — in­cludes the fol­low­ing:

• 40% large U.S. stocks rep­re­sented by the S&P 500.

• 20% small U.S. stocks rep­re­sented by the Ib­bot­son Small Com­pa­nies In­dex from 1926 to 1978 and the Rus­sell 2000 from 1979 to 2017. • 30% U.S. bonds rep­re­sented by the Ib­bot­son In­ter­me­di­ate Term Bond In­dex from 1926 to 1975 and the Bar­clays Cap­i­tal Ag­gre­gate Bond In­dex from 1976 to 2017. • 10% cash rep­re­sented by 3-month Trea­sury bills. Here’s the tricky part. A client who be­gan their in­vest­ing life in 1926 at age 35 had a far dif­fer­ent ex­pe­ri­ence than one who, at age 35, be­gan their in­vest­ing life in 1940. Why? Be­cause the se­quence of re­turns ex­pe­ri­enced in each client’s port­fo­lio will be dif­fer­ent based on the his­tor­i­cal moment. Thus, we need to an­a­lyze each rolling 60-year pe­riod from 1926 through 2017 to ac­count for each co­hort of clients. In fact, I’ve an­a­lyzed 33 dis­tinct rolling 60-year pe­ri­ods over the

A re­tire­ment port­fo­lio that is built for growth dur­ing both the ac­cu­mu­la­tion years and the dis­tri­bu­tion years can dis­trib­ute far more to a re­tiree than its start­ing bal­ance at the be­gin­ning of re­tire­ment.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.