 Now our next talk must be the most important one because we have dedicated the most time for this talk of any of the others most of the Most of the presentations today are 20 to 25 minutes. This one's a full 30. So it must be really good Dana and Spock is the founder and CEO of sensible money She's been named to the top 100 most influential financial advisor list by Investopedia for Contributions to financial literacy. She's been writing on retirement related topics since 2008 Including contributions to market watch us news and world report She's the author of the lecture series how to plan for the perfect retirement and The author of the books control your retirement destiny and social security sense available on Amazon she's been practicing as a financial planner since 1995 and Really has focused on people in their 50s and 60s when she realized that they needed a different type of planning than those of us who are not quite that experienced at life And so I present to you Dana and Spock not here to tell you the best way to structure your retirement portfolio There's about as many different ways to structure retirement portfolios as there are people in this room And a lot of debate about it and we're gonna hear some of that debate later today, which I am excited to hear What I am here to tell you is that when you get to the Decumulation phase that point in time where you have to live off your acorns. It's a different game The best analogy I've heard is it's like you go out and you play your first nine or nine holes of golf You go in you have lunch come out of the clubhouse you go back out and instead of golf you're on a hockey rink Different risks that you're exposed to in retirement And so there are ways that you can structure your retirement portfolio and your planning to help mitigate those risks if you decide that That's important to you. I Want to start off and ask what are the biggest what what factors have the biggest impact on your retirement outcomes? There's a lot of debate about this also Is it the date you retire? Is it inflation? Is it how much you've saved? Is it your withdrawal rate? Is it the actual investment or portfolio returns? Well in order to answer that question I think you have to take a step back even further and say well, how do you define outcomes? Is it being able to retire when you want? Is it being able to have the income or lifestyle that you want in retirement? Is it being able to have the security of knowing that that income will be there as long as you live? Is it being able to know that should you need long-term care or nursing home care later that you have enough assets remaining to cover those costs? There's a lot of different ways that we define outcomes and What I would love to see more of in our industry and in our discussions around these things is clarity around What's the advice we're talking to in relation to the desired outcome? So there's a lot of debate about specific advice, but not necessarily tying it to saying but if your desired outcome was this that would be the right advice and if your desired outcome was that then that would be a lot of The best advice so we see a lot of good things out there and all of them may be right Depending on what the desired outcome is When we look at the traditional way of defining outcomes for retirement portfolios it's using this efficient frontier and along the horizontal access you have risk and along the vertical access you have Potential returns and as you start to add stocks to the portfolio over the past We can see that our returns have been higher the numbers You're seeing at the bottom of the slide come from dimensional funds matrix book And it's a 37 year time horizon where they're saying if you had a hundred percent stock portfolio You would have averaged close to eleven percent that is gross of fees So there have been no investment fees netted out of those numbers and they measure risk by one year downside So at the red at the bottom you can see that What is the worst one-year return you would have experienced well if your outcome was to maximize returns over a long period of time You might say a hundred percent stock portfolio is the way to go But if your outcome was well, I don't know when I might need to use the funds and I want to have the you know the least Risk possible you might say well a hundred percent bonds is the way to go It's really depend on what is your primary outcome? The traditional way of constructing portfolios Maps different portfolios on the sufficient frontier and says well How do I reduce risk as measured by usually short-term volatility a quarter or an annual basis? How do I measure risk and what portfolio maximizes potential return for the least amount of volatility? But as we get into de-cumulation it changes so here on the left you see accumulator a and They have a half a million dollars and we're going to follow the arrows up their portfolio goes up 20% They have six hundred thousand dollars at the end of the year the next year the portfolio goes down 20% and they have 480,000 Same left-hand graph accumulator a looking at the bottom arrows those returns happen in exactly the opposite order So they start with half a million the portfolio goes down 20% they have 400,000 It goes back up 20% and they they have 480 so they end up in the same place But on the right we have de-cumulator Now they have retired and they know they need to withdraw $50,000 to support whatever their expenses are in that year of retirement Maybe it's a delay social security strategy They're going to take 50,000 out of their portfolio this year, but they may be taking less out of their portfolio in later years So they have half a million portfolio goes up to 600,000 they take 50 out They have 550 left it goes down 20% and they have 440 But if those returns happen in the opposite order their half a million goes down to 400 they take out the 50 They have 350 left it goes back up and they have 420 and If you compounded that poor seek that that poor sequence of returns, right the undesirable sequence of returns over time Even though the investments had the identical rate of return You could end up with a scenario where the person has substantially less money left or even runs out of money a lot sooner Now in the investment world this debate often turns into the way we frame returns So most mutual funds use something called a time-weighted rate of return in the way that they are Publishing their portfolio returns, which is the only way they can do it because they don't know the exact time that you made deposits and took withdrawals But internal rate of return will calculate your actual return based on the timing of your withdrawals And so when you're comparing returns against published indexes It often doesn't work the way you think and returns are not the biggest factor that's going to determine your success in retirement The paper I really love on this topic is by Jim sandage. This is available on the social science Research network. It's called chaos and retirement income and this is a graph He has in it where the orange bars represent a hundred percent stock portfolio. This is from 2000 to 2015 So we're looking at 15 years There's a five percent initial withdrawal rate and that withdrawal rates going up by three percent a year Well that hundred percent stock portfolio has an average return no fees of six point one percent a year and it runs out of money He contrasted that with a hundred percent fixed income portfolio They had a one and a half percent annual fee and earned four point eight percent as an average return and after the 15 years While it also declined in value fairly substantially there was still principle left and the point He makes is that the solutions that work for retirement income Did my mic just go out? Okay, sounded a little different over there the solutions that work for retirement income are not the same solutions that work When you're in the accumulation phase he even says that using some of the same tools that you use in accumulation might be dangerous So if using the same tools doesn't work, what are the factors that he says are most important Well, he makes the case that beating the index or beating the market in a negative return is the most important factor now I don't know if I that is the only or singular most important factor But I think it's an interesting perspective and when you look at the research There are portfolio designs that can help minimize the impact of a worst-case scenario So when you look at all of this and you shift to what would be the retirement income efficient frontier Across the horizontal access you would have annual consumption and across the vertical access. You would have average remaining assets to pass along If you wanted to maximize your income, of course You're going to reduce the odds that you're going to pass along as much or have as much left later in life Now if this is my simplified version of a retirement efficient frontier But there are many versions out there. This one is from Wade Fow. It's from a paper on the retirement income Institute And on the vertical access he has average remaining assets and on the horizontal access He's framing it in terms of the percentage chance that you would not meet Your desired level of spending Now the blue line shows a portfolio That's only stocks and bonds and the black line shows a portfolio where you have added fixed income annuities and The point he's trying to make here is that by adding another asset class fixed income annuities in this case You can actually reduce the odds that you're not going to meet your desired level of spending and Increase the average amount of assets that you are likely to leave to errors Now again, I'm not showing this slide to say oh, you should all run out and add income annuities I am illustrating that there are portfolio designs that can hedge different risks and in this case the risk to hedge is The risk that you may outlive your money or the risk that you may not meet your desired level of spending over time And so you can consider these strategies in light of the goal If that's a concern or a goal of your of yours a portion of your portfolio can be allocated to help hedge that goal Now some additional research by Wade foul, which I did email and dialogue with him before because this is a article He wrote in 2017 It's a three-part series article and I wanted to make sure that he still stood by this research He has anything changed and is it okay if I use it because I'm not a researcher I'm a practitioner what I do is take this research and figure out How do I actually apply it in the real world? So I do rely on a lot of our speakers here and the research they do and it's greatly greatly appreciated So in this article He talks about time segmentation or something called rolling bond ladders I like to refer to them as rolling income ladders because you wouldn't have to fulfill The bond piece of your portfolio with bonds you could use CDs. You could use fixed annuities There's other ways to fulfill it think of it as a rolling income ladder Now he compares a traditional basically 60% stock at 60.8 in this article 39.2% fixed income allocation that you would rebalance automatically every year to that allocation and he wants to compare that against using bond ladder strategies and in this case it was a 10-year bond ladder and so at the very bottom The lighter gray color Reframed automatic rolling ladders. Well, let's say you started off with a 10-year bond ladder I'm gonna use a simple analogy. Let's say I have a million dollars I know I need to take $50,000 a year out and so I want a bond ladder in place to cover the first 10 years of my withdrawals So I'd have a bond or a CD maturing in the amount of 50,000 a year every year for 10 years That would take up about half a million of my portfolio The other half a million would be invested in growth some form of growth portfolio Well an automatic rolling ladder would mean now I'm in year 9 of retirement I spent my 50,000 and I would sell some of my stock portfolio and buy a bond that matures 10 years out So I would keep rolling my ladder forward. So I always had a 10-year runway ahead of me Now the rebalancing with a bond ladder or rolling ladder approach only goes one way You're only rebalancing from stocks to bonds versus a traditional Rebalancing process, you know, you could rebalance either direction to a static allocation Well that automatic rolling ladder was the very worst performing of the two and he also wanted to see is there anything magic about the actual bond ladder or If I just rebalanced my portfolio to the same allocation That would have Resulted if I did the bond ladder. What difference does that make? And so with the automatic rolling bond ladder the it performed worse than if you just rebalanced and that makes sense Because we're forcing to sell stocks, right? We're only going from stocks to bonds even at times where normally you would be rebalancing the other way So then you get into the teal the next color up and it was a market-based rolling ladder meaning I would only extend from stocks to bonds if the portfolio had a positive return or had exceeded a certain threshold amount And so the market-based portfolio You know did better than the equivalent matching total return a Little bit better not substantially better Then we get into the set of dashed gray lines That's just under the yellow and that was your traditional 60 40 and it did pretty good right just Rebalance every year 60 40, you know, that's not bad Especially when you look at the 30 year mark that strategy works pretty well and if you're a do-it-yourself or it's easy to implement and Over time it's pretty effective. So that's pretty nice to see in this research And then you have the personalized rolling ladders, which says I'm going to build this income ladder and Benchmarket against my personal glide path and I'll show you what that looks like in a minute But it's basically measuring every year How much do you have to have remaining to know that your portfolio will last for life? And there's a personal calculation and a personalized rolling ladder says well You're going to extend that every year based on your personal plan. There's no automatic it's not necessarily based on what the market's doing if you're ahead of your personal benchmark you extend your ladder and That had the highest probability of success, especially as you get out into longer time frames But Wade wanted to know Why so if I just rebalanced to that same allocation and what actually happens in this personalized ladder is if you had a Poor series of returns you actually end up with a slightly higher stock allocation as you go forward And so if you had just rebalanced to those same allocations, you would have had the same result So there's nothing magic about actually having the bond ladder in place There's a lot of behavioral aspects that are talked about which I personally agree with I think Behaviorally, it's very easy for people to understand what we call a paycheck replacement portion of their portfolio Versus a growth portfolio and makes it much easier for them to stick with their portfolios But he does make the case in the article without that bond ladder or planning process that goes with it It would be really hard to have known What to rebalance to because it wasn't a static allocation It was an allocation that was specifically driven from a personal benchmark and a personal plan And so again I use this just to illustrate that there are certain portfolio strategies when it comes to the Decumulation phase that can increase your probability of success So when I think of the keys to great outcomes, it's planning and Then it's aligning your portfolio methodology to that specific plan now when I talk about planning This is an example of planning out cash flow by account In this scenario in section a you see social security income beginning in two years because the oldest spouse is currently 168 and they're waiting until 70 for them to start social security And you see that social security go up because when the other spouse later claims they it takes several years There's about a six-year age difference between the two Then you see section B which are withdrawals by account type You see the total at the top they have about 2.6 million in assets And we'll talk a little bit more about how those withdrawals by account type were derived Section C unspent withdrawals well when you use software to project this if I took $100 out of the IRA more than I actually needed to consume that year The software has to do something with $100 so column C is just a catch-all It's if I actually withdrew a little bit more money than I needed from a tax deferred account it's got to put that money somewhere and D says well here's our total cash flow available to retirement notice that it's going up over time That's because of inflation So when I talk about thorough planning you have to customize the assumptions to you And so here we carried section D over and we're going to outline where it's going We've got housing expenses no mortgage. So that's just property taxes and insurance living expenses are inflating at 3% But they're slowing down to an inflation rate of 2% about a decade into the plan Because when we look at actual retiree spending habits There are the go-go years the slow go years and then what are referred to as the no go years and spending does slow down And you can reflect that in the types of assumptions that you use Medical expenses are using a 5% inflation rate We also have a specific column for big-ticket items Which is referring to auto purchases and we find that the frequency of auto purchases slows down as people enter There are later retirement years, but we do need to account for that And then you'll see their monthly after-tax after big-ticket is what most people want to know You know where I had to spend each month, you know after car purchases and after taxes are paid And that is going up based on the customized inflation assumptions And then over on the right if the portfolio averages a 5% return throughout retirement It's charting out. What are the average remaining assets or what are the expected remaining assets after all of the withdrawals have been taken Well, if you've done this kind of planning then you can customize your portfolio methodology to your plan So when we look at these specific withdrawals, I'm going to spend down that non-retirement account first and in the background There's Roth conversions happening in the first three years Wade's going to talk about that in a few sessions But if you've tax optimized the withdrawals and you've said well, here's the most tax-efficient way for me to withdraw Then the withdrawal pattern can help dictate the allocation of that specific account And what I still see a lot of people that will have each account balanced 6040 for example or 7030 But in this case if I'm never going to touch Sam's Roth I'd probably have it a hundred percent invested in equity and if I'm going to use all of my non-retirement account in the first Seven years, I'm probably going to ladder it into CDs or treasury bills and have none of it in equities And then the two IRA accounts are likely going to be a little bit more balanced But having that personalized plan allows you to as I described it create a job description for each account And then you're matching the allocation design to of that account to its specific job Description defined as what are the cash flows it needs to produce for you Now if I wanted to add an income annuity in Then I might look at Sally's IRA and say wow, you know, I take out on a minimum 30,000 a year So maybe if I were going to place an income annuity into this portfolio I would do it within Sally's IRA because I'm not changing the tax consequences of the portfolio I've already optimized when I withdrawals based on that So I might run out and say well how much of Sally's IRA Would it take if I wanted to generate a guaranteed 30,000 a year and add that into my retirement portfolio If I wanted to use an income ladder personalized income ladder This would lay out the cash flows that I would need to build in each account and help me decide how much should be allocated to that So a little more deep dive on the income ladder, which I am a fan of I am a little biased when it comes to that But that's because I don't have the luxury of saying well, I'll just do it any other way When you're running a firm and have a fiduciary responsibility you look at well I need this to money to last for the rest of someone's life and if I'm responsible I want to do it in a way that gives them the highest probability of success at least based on what the research shows today So you think of your income ladder as predictable cash flow Paired with a growth bucket and there has to be a process to say well when that growth bucket is I like to think of this Overflowing then when do I refill my income ladder and Wade talked about some of the different ways to do that One of them was his personalized rolling ladder and that is based on the work of asset dedication Which he references in his article this is a Personalized plan where the dashed white lines represent what's called the critical path a minimum amount of assets This person needs to have remaining for their plan to work for life Now it might not be the desired plan Although some people do come in and say I want to die with a dollar in the bank How can you make it to my last check bounces? I'm like well, it's a little hard to do because I don't know how long you're gonna live in and so But most people don't really want that and they do want some assets remaining But the yellow line tracks their actual portfolio against that path and when the yellow line is ahead of the dashed white line Then you would extend your income ladder now Wade and our dialogue said he's been playing around with a simpler way to do This where you could just track it against your starting value So whenever your portfolio exceeded your starting portfolio value you would extend the income ladder And so this would be a way you could implement that kind of strategy on your own And I'm hopeful he'll come out with that research for it pretty soon and and show us how it looks So we've talked about the fixed income side adding income annuities or bond ladders, but what about the equity side? Well traditionally We use something like the economy car on the bottom, which is a risk adjusted return portfolio built on the efficient frontier Probably gets good gas mileage. It's gonna get us around it can hold a reasonable number of people Or we could go for the sports car like who cares about speeding tickets. I just want to go right? We're gonna maximize returns Or we don't hear this talked about as often but what would an all-weather portfolio look like and so we could design a portfolio to maximize the minimum gain or To maximize the outcome in a worst-case scenario meaning if I got a worst-case decade in equities What would have held up the best? Am I at time? Five minutes perfect. I can get through the rest So I'm using the research of asset dedication from an article published in the Journal of Financial Planning And here they compare four strategies. These are just equity strategies So looking at you've already decided if you wanted to add income annuities or bond ladders And now you're looking at is there a different way to design my equity portfolio S&P 500 is the benchmark the red is our sports car. We're just going for it, right? We're gonna maximize returns the blue is our economy car We're gonna look at risk-adjusted returns and four is what's referred to as mini max Which is a concept that comes out of gaming theory and says well, how do I design a portfolio? That's going to hold up the best in a worst-case scenario For those who want all of the deep dive research they use 16 different categories They pulled all the return data from the Kenneth French data library. We'll pass right over that So here's our results So we have our S&P and in a worst-case scenario There was 40 different time horizons studied it took 15 years to get back to zero Our dashed lines show our average return And so we see as we know the average return for the S&P is about 10% And the average would study all of the rolling one-year time frames or all of the rolling five-year time frames in those those 40 years studied Next we add in maximizing expected return Now I can't remember what the allocation of this portfolio was but it might have been like a hundred percent small cap value So it would have been something like a one asset class portfolio Now again, it took 15 years For our worst case to get above zero 15 years is a long time if you're in retirement But our average return is now much higher and So if I'm more than 15 years away from retirement, and I said well, that's my goal that might not be a bad strategy I myself am still a hundred percent equity. I'm 52 years old I think the first year I would even conceive of retirement would be 65 although likely for me at 70 But what I will do when I'm 55 is I will sell enough of my equity portfolio And I will be buying a bond that matures when I turn 65 For whatever amount I think I might need to withdraw and so I will slowly build out my bond ladder by the time I get to 65 Next we have the maximize sharp ratio. This is our economy car and So here again, it was 15 years before our worst case Scenario rose above zero, but our average return when we got out to about 10 really about 15 years Actually, our average return the whole time was higher than just the S&P or just our other scenarios and Last we have our mini max and so now our worst case scenario Got us To back to break even in six years. So half the time which again if you're retired, that's a really big difference The trade-off though is the average return is Substantially lower than most of the other strategies And so there is a trade-off in retirement if you want to build your portfolio to hedge Against downside risk. There is no free lunch. We talk about that all the time But there are strategies that can help hedge different risks Wrapping up. I think it's really important to decide what the goal is If you're still using a portfolio, that's going to maximize average returns You need to understand that in a worst case scenario that portfolio may not hold up as well Use planning and portfolio strategies designed to help you achieve your goals Whatever those might be some people want to spend as much as possible early in retirement and really do or like my kids are fine You know other people they really want to maximize what they're going to pass along to errors or do gifting strategies along the way Evaluate income ladders and annuities in their ability to help you achieve the goal and evaluate portfolios relative to the goal Not comparing one to the other What I still see a lot of and I mentioned this earlier is Comparing returns of one strategy to another and what I would love to see more of in Retirement particularly when we're talking about the decumulation space is thinking of these things in terms of what goals do they help hedge and Is that important to me and I really think that can help shift the conversation and make so much of we see Of what we see out there a little more clear a little more understandable And then we'll be able to to put it in its right place in the framework Back to you Jim