Investments Archives - Integrated Retirement Advisors

Yes, You Can Lose It All, Even If You’re Wealthy

by M. Nahum Daniels

If you’ve been wondering about the book I wrote, RETIRE RESET!, we are publishing some excerpts right here on our blog so that you can learn more. Along the way, you will learn why our firm, Integrated Retirement Advisors, was founded: we’re on a mission to help people with retirement!


Here are some excerpts from Chapter 6.


       “Unless you have millions and millions and millions … you cannot retire on the investment return on your savings … because there is no return on it.”

       Jeff Gundlach, Bond King & Modern Art Collector, Founder and CIO, DoubleLine Capital


I first conferred with Mauricio in 1995, overlooking New York’s Central Park from a Fifth Avenue penthouse filled with modern art. Studying his experience as a do-it-yourself retiree has taught me an invaluable lesson: Even if you enter retirement with many millions, you are always subject to the risks, rules and ratios embedded in modern retirement planning. Should they go misunderstood or ignored, the result can be depletion and austerity—no matter how wealthy you may be starting out. Retirement success, on the other hand, especially if you have only modest wealth, depends on an informed approach to managing your nest egg that properly balances your capital and spending over an open-ended time horizon.

Do you find it hard to believe that even the very rich can run out of money? (Do you find it even harder to be sympathetic?) Allow me to demonstrate the vital lessons worth learning.

Deciding to enter retirement as he turned 65, Mauricio had just completed the sale of a Parisian fashion company he founded, clearing a nest egg of $100 million. Our purpose in meeting that day was to discuss his legacy planning. He faced a 50% estate tax upon his death and was looking for ideas that could mitigate the impact of those levies on his children and grandchildren. As for Mauricio’s income planning, he wasn’t looking for help from me or anyone else. He made it clear that he would consider only US Government bills, notes and bonds.

Mauricio, as it turns out, had serious trust issues. A Holocaust survivor, he spent some of his formative years in Buchenwald, the Nazi slave-labor camp near Weimar, Germany. At age 15, he was one of the prisoners liberated by American troops in April 1945. While maintaining his European connections and building a post-war business there, Mauricio became a proud and grateful American citizen, trusting in the inherent goodness and reliability of US government promises. It was simply unthinkable that the United States of America could ever default. In his mind, government paper was as safe as safe could be, and he viewed it as the key to a “risk-free” retirement that would let him sleep soundly at night while enabling him to live a fulfilling life by day.

And he wasn’t one to fuss. A saver at heart, he’d be happy to buy and hold US notes for their ten-year duration and simply roll them over to new issues when they matured. He would hear of nothing else. Risk was anathema. Professional advice was gratuitous. He would manage his own money by lending it (safely) to the US Treasury.

Besides, in January 1995 savers like Mauricio could still thrive. The risk-free 10-year Treasury note was yielding 7.69%. In theory, it would pay him annual interest of $7,690,000 for ten years without having to dip into principal. What’s more, that yield was tax-advantaged: Interest income on US Government obligations was then (and is still) given preferential tax treatment. He would have to pay about 40% in federal income taxes but would avoid New York state and city taxes that together could have easily added another 10% or so to the burden.

Mauricio estimated that around $4.6 million spendable dollars would enable him to fund his family needs and essential living requirements, his discretionary globetrotting, his passion for modern art and his generous philanthropy. So, he matched his lifestyle to the income his capital would generate. “Living off the interest,” he began his retirement by effectively withdrawing 7.97% from his nest egg. As for his estate-tax obligation, he would simply set up a life insurance trust and be done with it.

Later on, I learned that Mauricio had failed to factor in inflation, which averaged around 3% a year during the decade that followed (and even more in the prices bid for modern art). To keep up with his increasing cost of living he would have to up his annual withdrawal. To avoid dipping into principal, Mauricio faced the sacrifice of reducing his art-buying and charitable giving. He decided to give his lifestyle priority. Luckily, falling Fed interest rates during this period mitigated any capital depletion as he sold some of his bonds into a rising-price market. Still, after ten years, he found that he was left with only $85 million of the $100 million with which he began (Table 2).

When he rolled his portfolio over in 2005, however, 10-year rates on government notes had fallen to 4.16%. Reinvesting his capital at age 75, he would be earning $3.54 million in interest, less than half of what he had started with ten years earlier, and after federal income tax, it would leave just $2 million spendable dollars. Meanwhile, his annual expenses had inflated to over $10 million. Withdrawing $10 million a year from an $85 million nest egg would equate to a 12% annual withdrawal rate. Now 75, he wanted that money to last him another 25 years, just to be safe, and a 12% withdrawal rate would put him at great risk of premature depletion.

Facing the same challenge that can confront every retiree, Mauricio recognized that something had to give—despite the abundance with which he was blessed. He would either have to cut back his lifestyle or tap into principal and risk running out of money. He decided to reduce his annual withdrawal to $6.5 million. His art collecting slowed; his travels became less frequent; his charitable contributions less charitable. Bottom line: He started to feel pinched.

Despite the belt-tightening, at age 85 Mauricio found he only had $42.5 million remaining when the time came to replenish his matured portfolio with newly issued bonds. His luck couldn’t have been worse. It was January 2015 when the ten -year rate hit 1.81% and Mauricio had to face the reality that his remaining principal would generate taxable interest of just $766,000 each year! Still healthy and active, he found himself a victim of his own loss-aversion, severely set back by the Fed’s Zero Interest Rate Policy (ZIRP). His was an almost unbearable dilemma: Accept more austerity by further shrinking his lifestyle, family and charitable giving (and start to sell off his beloved art collection) and still face possible depletion at age 95—and/or chase higher yields by taking on more risk.


A Shadow Banking Crisis

Mauricio’s dilemma is the same one that has faced all savers since the Great Recession of 2008 [and we are seeing it again now, during the current 2020 crisis]. Low yields pressure you to turn to a subset of “shadow banks” for greater returns.

Like the big commercial banks, the shadow banks are financial intermediaries. Unlike their commercial counterparts, they are not “cash depository” institutions; they are neither able to borrow from the Fed’s discount window in a crisis nor insure your account for up to $250,000. Some of the shadow banks—the ones of interest to us as investors—specialize in the issuance, custody and trading of non-cash financial instruments known as stocks and bonds. These institutions include the investment banks, broker dealers, money management firms, mutual fund companies and hedge funds that comprise the Wall Street community.

The Wall Street subset of the shadow-banking universe provides no guarantees. On the contrary, like commercial banks they commerce in risk—offering returns arguably great enough to compensate for the possibility of “capital impairment,” i.e., financial losses, temporary or otherwise. The Wall Street shadow banks earn money by exposing your cash to risk and trading their own.

Transforming Savers into Investors: [Stocks and Bonds] 

When buying a bond, you’re lending money to a government or business in return for an interest payment over a given period of time, at the end of which you expect to be fully repaid. Like lending to a bank when you make a deposit, you are giving the borrower the use of your money for a price. Bonds come in a myriad of forms, offering claims against the borrower’s assets in the event of default based on the specific terms of the loan set forth in their respective indentures. If a secured borrower defaults, you may claim against its assets for repayment and you may come before other types of creditors. The less risk incurred in making the loan—i.e., the more credit-worthy the borrower—the lower the interest offered. When held to maturity, the interest payments over time comprise your yield. Their steady cash flow stabilizes their value, so in terms of price, bonds tend to be less volatile than stocks.

Buying a share of stock represents an incident of ownership, or equity, in a business. Stocks have no maturity date; you own them until you decide to sell them. Their payouts come in the form of dividends made at the discretion of management—both in terms of magnitude and periodicity. Some years you may get more, some less, and some none depending on the company’s operating profitability and other financial circumstances.

Among larger, mature dividend-paying US companies, dividends reflect about 50% of annual earnings. Dividend flow as a percent of the share price you paid is a critical component of stock ownership, sometimes amounting to 40% of the total return earned over time. But as an owner, you are taking the risk of total loss in the event of business failure because you are at the bottom of the capital stack, and lenders get paid first. Risk of total loss is balanced by the potential for greater reward in the form of price appreciation.

Company growth tends to be reflected in a rising share price, offering the potential for a gain on the capital you invested in addition to the dividend yield. These two components—dividends and gains—make up the “total return” potential of your invested capital.

Importantly, stocks tend to be much more volatile than bonds in terms of price.

The Wall Street brokerages buy, sell, hold and trade securities (including stocks and bonds) for their customers’ accounts. Wall Street dealers also own stock and bond inventories to facilitate customer transactions and earn proprietary trading returns.

Broker/dealers do both. The money center commercial banks, like Bank of America, have wealth management arms that are their broker/dealer affiliates, like Merrill Lynch.

Like the global economy, the investment business too is always evolving. Traditional stockbrokers can execute customer orders or make recommendations considered suitable based on their knowledge of the client’s risk tolerance, investment objectives and time horizon. Fee-based portfolio managers at mutual fund companies, money management firms, and hedge funds usually require a free hand to buy and sell securities on a client’s behalf, so handing over discretion to the portfolio manager is often mandatory. Commission-based brokers at the big bank “wire houses” and other execution-based brokerage firms typically require a client’s consent to a trade before its execution.

Trading for Trading’s Sake

With or without discretion and whether commission- or fee-based, the buying and selling of securities encapsulates the raison d’être of the Wall Street shadow banks, and securities trading is their lifeblood. But trading for trading’s sake tends to invite speculation and receives criticism from buy-and-hold investors who tend to be more analytical and systematic.

Beginning in the late 1990s, stockbrokers took on the title “financial advisor” when the big wire houses shifted from a commission- to a fee-based revenue model and wanted to exude a more knowledgeable, caring and comprehensive approach to customer service. Fees are a steady income source that levels out brokerage-firm cash flow, so most firms prefer them to the less consistent flow derived from broker commissions.

Trading is a win/lose proposition that pits buyers and sellers against each other, with both sides seeking an advantage. Buyers want to spend less and sellers want to get more for their securities. Traditionally, investment securities are valued—or priced—based on specific free -market fundamentals. For bonds, the key metric is “yield,” or the cash flow they generate. Yield translates into price: the lower the yield an investor is willing to accept, the higher the price that investor is willing to pay for a bond—the standard of “fixed income” investments.

Bonds reflect the forces of supply and demand in capital markets. If borrowing demand is high and money supply is low, the cost of money naturally rises and borrowers offer higher yields in the form of interest on the debt they issue. If money supply is plentiful and loan demand soft, lenders are likely to accept a lower rate for putting their surplus cash to work. In a free market, the forces of supply and demand naturally find equilibrium.

An important concept that retirement investors need to understand is that underlying Wall Street’s advice is a narrative that can give rise to exaggerated expectations and a methodology that can ultimately cause your undoing. Rather than buttressing the retirement process, the conventional principles of diversified investing, applied to retirement portfolios, may actually reduce portfolio reliability. Investing in securities at the wrong times and under adverse conditions can increase the odds that you run out of money; if you do make poorly timed decisions, then protecting yourself and improving your probability of success require you to self-impose austerity from the moment you start spending down.

The Wall Street Retirement Portfolio

The “balanced portfolio,” which can sometimes over-weight stocks and at others over-weight bonds, has become Wall Street’s signature retirement planning product. Applying Modern Portfolio Theory (MPT), it diversifies among stocks and bonds along an efficient frontier of return per unit of acceptable risk. A 60-40 stock/bond mix is deemed suitable by regulatory authorities for most individuals with median risk tolerance, so an advisor or firm can rarely be faulted for recommending it, even if an outcome falls into the rare extreme of return distribution. If the S&P 500 Index historically averages 10% growth per year and the UST 10-Year averages 5%, then a 60%/40% stock-bond portfolio can be expected to average 8% going forward, goes the oft-repeated incantation.

While the exact composition of each asset class may differ somewhat from firm to firm, most Wall Street customers end up with remarkably similar “investment policy” portfolios in terms of allocation, downside risk exposure and upside potential.

Projecting future returns based on historical averages is known as “deterministic” modeling. It is a form of linear forecasting wherein expected returns do not vary over time—and that’s its key flaw: the average return is most likely the one return an investor will never receive. Thanks to the increasing availability of computer power, “stochastic” modeling has grown in popularity. Applied to statistical sampling, stochastic modeling incorporates randomness. It has been tailored to retirement planning in the form of Monte Carlo simulations, named by one of its original developers after his favorite pastime—calculating the odds of winning at the casino.

In Monte Carlo computer software, returns and inflation are treated as random variables. Monte Carlo “engines” generate thousands, tens of thousands or even hundreds of thousands of possible combinations that produce a probability analysis, i.e., a statistical range of outcomes reflecting the financial impact of various return sequences. Now the standard retirement “modeling” tool, it perfectly captures the Wall Street approach to securities-based retirement planning by surrendering to uncertainty and accepting the necessity of playing the odds.

Changing the input assumptions and the type of mathematics used in a given Monte Carlo engine can materially alter the results. Critics focus on this subjectivity, which they claim introduces bias into the design. Mathematician and financial advisor James Otar, CFPTM, argues that the methodology tends to overstate the probability of favorable outcomes, giving clients a dangerously ex-aggerated sense of security.

Leading researchers in retirement-income planning have recently published seminal studies that address these issues, with some surprising conclusions. Working together, professors Wade Pfau, PhD and Michael Finke, PhD, of the American College of Financial Planning, along with David Blanchett, CFA, CFP, head of retirement research at Morningstar Investment Management, tested the 4% Rule under historic return assumptions and then under forward-looking assumptions, illustrating the possibility of Shiller CAPE-based lower returns.

The group confirmed that based on historical data (stocks returning 12%, bonds returning 5% and a CAPE ratio of 16), a portfolio allocation to stocks of roughly 15% or more would have likely achieved a 90% probability or better that a portfolio would survive thirty years paying out 4% adjusted for inflation.

But if future expectations are lowered based on current interest rates (bonds at 2.5%) and the reduced stock returns predicted by today’s above-average CAPE ratio—even if lowered only modestly—the odds of success plummet, barely exceeding 50% no matter how high the stock allocation!

This industry-standard Monte Carlo probability analysis conveys a stunning implication: Using forward-looking assumptions, Bengen’s “the more stock the better” equity recommendation for portfolio reliability may be overstated. Given reduced future returns, it may even court disaster, driving the odds of 60/40 portfolio success down to 56%—or little better than a coin toss.

Figure 34. Projected Success Rates

Looking ahead based on lowered return expectations, Blanchett, Finke and Pfau questioned how a 90% (or higher) probability of portfolio success can be sustained. The answer: Only by reducing the [retrirement] withdrawal percentage in inverse ratio to the equity allocation; in other words, the higher the ratio of stock held in a portfolio, the lower the safe withdrawal rate you should use and the less income you should take.

Chapter 6 Takeaways

  1. Investing involves risk, including, in the worst case, a total and permanent loss of your principal. Past performance is no guarantee of future results. Neither asset allocation nor portfolio diversification guarantee profit or protect against loss in a declining market. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.
  2. The projections or other information generated by Monte Carlo analysis tools regarding the likelihood of various investment outcomes are hypothetical in nature. They are based on assumptions that individuals provide, which could prove to be inaccurate over time. Probabilities do not reflect actual investment results and are by no means guarantees of future results. In fact, results may vary with each use and over time.
  3. It is advisable to understand the risks, rules and ratios embedded in the financial dynamics of modern retirement if you want to avoid failure—regardless of how much money you have at the start.
  4. Former Fed Chairman Ben Bernanke’s “new normal” of very low interest rates has turned many yield-starved savers into return-chasing speculators.
  5. Given current market valuations, the Shiller CAPE and other historical market metrics caution that equity returns over the next ten years or more may be lower than long-term averages might lead us to expect.

Questions for your financial advisor

  1. Do you rely on a Monte Carlo “tool” to project the probability of my (our) retirement success, and does that mean you can manipulate its mathematical assumptions to reflect better or worse outcomes?
  2. Do you counsel your clients to trust that the future is going to be rosy, or do you recommend they plan to withstand the worst while hoping for (and positioned to participate in) the best?
  3. If I’m nearing or in retirement, what initial withdrawal percentage would you recommend to set a floor for distributions from my nest egg?
  4. How did the balanced portfolio you’re recommending perform peak to trough, i.e., from October 2007 to March 2009?
  5. If we get a repeat of that performance at any time over the next ten years, what will it mean for my (our) withdrawals and standard of living thereafter?



If you would like to discuss your personal retirement situation with author Nahum Daniels, please don’t hesitate to call our firm, Integrated Retirement Advisors, at (203) 322-9122.

If you would like to read RETIRE RESET!, it is available on Amazon at this link:

Rethinking Your Retirement Investing To Hedge Against A Market Downturn


Rethinking Your Retirement Investing To Hedge Against A Market Downturn

Studies show most Americans aren’t saving enough for retirement. A recently-released World Economic Forum report warned that most retirees risk running out of money as much as a decade before death. And the anxiety of being ill-prepared for the golden years can grow when portfolios do not, leading some advisors to recommend over-weighting stocks to provide the impetus for long-term growth.

Retirement planner Nahum Daniels thinks the risk-reward trade-off of investing a retirement nest egg in stocks and bonds can result in even more worry. And, given a bad sequence of returns -coupled with the fact that people are living longer than in previous generations -many retirees could run out of money faster.

“Psychologically, we’ve grown confused about the financial dynamics of retirement,” says Daniels (, author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. “Since the early 1990s, when the 401 (k) replaced the defined benefit plan in corporate America, there’s been a fundamental shift in perception. When retirement was pension-based, planning was about guaranteed income and the employer had to keep the promises it made. Today, participants in 401 (k) plans have to know about stocks, bonds and ‘Balanced Portfolio’ management because they’re responsible for their own unpredictable outcomes.

“Ironically, centering a retirement portfolio on Wall Street’s securities-driven risk/return tradeoff may actually be a formula for an even more insecure retirement. The reason is the cyclical volatility inescapable in equity markets. Nor are bonds immune from losses: The Fed’s rate manipulations, coupled with our nation’s current $75 trillion debt overhang, introduces an abnormally high level of volatility to bond prices. The real crisis in retirement planning is not just our savings shortfall but our misguided mindset; we need a perceptual shift about what our real goals are and a tactical reset to reach them.”


Daniels offers four principles to reset a retirement portfolio and hedge against a market downturn:

  • De-risk. Whether in the accumulation or spend-down phase, the retirement nest egg cannot afford market losses without eventually paying out less. “Insulate your nest egg from them and guarantee the outcome when you can,” Daniels says. “It’s unnecessary to resign yourself to self-imposed austerity to accommodate market volatility.”
  • “Size your nest egg as efficiently as possible by optimizing the sustainable yield it can generate,” Daniels says. “Work it back from your income need. For example, if your nest egg supports a withdrawal rate of 5 % rather than 3%, you can achieve your goal with 67% less capital.”
  • Daniels says the latest academic research favors the integration of actuarial science with investment expertise in the construction of a “stable-core” retirement portfolio. “Longevity insurance has a heightened economic value in an era of open-ended life expectancy,” Daniels says, “while historically no asset class beats equities for long-term growth potential. Balancing the two is key to getting the best result and hard-boiling the nest egg.”
  • “Today’s fixed index annuity (FIA) lends itself well as the actuarial component of a retirement nest egg,” Daniels says. “Anchoring a stable-core portfolio to it can protect against market declines while still participating in a needed share of upside potential.”


“Buying and selling securities at all the wrong times can increase the odds that you run out of money,” Daniels says. “Retirement investors need a form of protection that can keep them invested without costing so much that it devours their return in the process.”


About Nahum Daniels

Nahum Daniels ( is the founder and chief  investment officer of Integrated Retirement Advisors, LLC. He is the author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. A Certified Financial Planner and Retirement Income Certified Professional, Daniels has served mature investors for over 30 years.

How An FIA Can Replace Bonds As Your Hedge Against Volatile Rates


How An FIA Can Replace Bonds As Your Hedge Against Volatile Rates

Interest rates heading to zero or below in the United States, following the pattern set in Europe and Japan, will only make it harder for most nest eggs to do their job. They could also foreshadow low returns across most major asset classes, making both wealth accumulation and retirement-income generation harder to achieve. With the bellwether 10-year Treasury note bouncing around 1.5% and the 30-year Treasury bond hitting all-time lows under 2%, all fixed income yields are expected to trend lower. If governments and high-grade corporates start paying little if any interest, they will contribute less and less cash flow to a “balanced” retirement portfolio.

On the other hand, were rates ever to normalize, longer-dated bonds would suffer a capital loss, undermining the other role in Wall Street’s policy portfolio played by bonds as a counterbalance to the volatility of stocks.

Keep in mind that the shrinking 10-year rate is also the key metric for appraising asset value and risk. Zero and/or negative rates may initially boost asset values, but longer term, the next round(s) of rate reductions may trigger a major reset in equity, bond, and real estate values, already considered on some measures to be inflated.

A strong argument can be made that retirement investors are living through a systemic paradigm shift and that the resulting uncertainty should focus them on the potential utility of hedging. Recent academic research agrees that investors in or near retirement can benefit from reallocating their nest eggs not between stocks and bonds but by integrating equities with longevity insurance.

Today, the Fixed Index Annuity (FIA) stands out as a rapidly evolving form of longevity insurance designed to anchor a retirement portfolio. Independent research, most notably under the auspices of Yale School of Management Professor of Finance Emeritus Roger lbboston, makes the case that the right FIAs can complement or even replace bonds in the nest egg, adding as much as 1 % to 2% of excess annual return – or even more in a low-rate environment. Add to that excess return the 1 % to 2% a year that actuarial science can contribute in the form of “mortality credits” and we can start to breathe a little easier.


Long-term pros may outweigh the cons

It’s important to note that the FIA is complex and has been characterized as such by the Securities and Exchange Commission, the National Association of Insurance Commissioners, and the Financial Industry Regulatory Association. Any guarantees are backed solely by the financial strength and claims-paying ability of the issuing company and the instrument offers varying levels of access during a gated surrender-charge period. Thus FINRA rightly stresses that investors do their due diligence when choosing among advisors before deciding whether a certain FIA is right for you.

The effort may well be worth it. Emphasizing downside protection, the FIA aspires to deliver steady mid-single-digit returns -without exposing the policy’s accumulated value to market volatility.

Because FIA performance is linked to a market index stripped of its downside risk, Wall Street’s risk-return formula trades off some of the index’s upside potential.

Those trade-offs take the form of caps and participation rates quantified by the investment banks serving as an insurer’s counter-parties. Accepting less upside to avoid market losses and stabilize returns is the price investors have always paid to hedge, and it’s up to each of us to judge whether it’s a price worth paying in the FIA.


Nahum Daniels is the founder and chief investment officer of Integrated Retirement Advisors, LLC., a Registered Investment Advisor in the State of Connecticut. He is the author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. A Certified Financial Planner and Retirement Income Certified Professional, Daniels has served mature investors for over 30 years.

Black Swan Portfolio Construction

What Is a Black Swan Event?

Financial professional-turned-writer, Naseem Nicholas Taleb, wrote the book The Black Swan after the 2008 stock market crash. He pointed out an interesting problem with statistical modeling in financial planning.

For most of history, swans were large birds known for their striking, white color. In fact, swans were considered nearly synonymous with the color white for centuries. Referring to a “black swan” meant something completely impossible or presumed not to exist. That is, until 1697, when seafaring explorers discovered black swans in the southern hemisphere of the New World.

Thinking about the discovery of black swans lead Taleb to think of an interesting logic problem—how many white swans would you have to see in order to predict the next one would be black? His answer: You wouldn’t. You didn’t even know they existed, so you would never predict one, no matter how many swans you saw.

Essentially, you don’t know what you don’t know, and so your statistical model may be missing a critical factor in calculating financial projections. You must account for unforeseen black swan events in the construction of the retirement portfolio.

The Ten Principles of Retirement Portfolio Design:

  1. The future is always uncertain and bad things—like fat tails and burst asset bubbles—happen when least expected, so retirees and those nearing retirement should plan to withstand the worst possible economic outcomes while positioned to participate in the hoped-for best. Retirees are therefore well-advised to focus on risk mitigation in addition to asset class diversification, choosing investment vehicles that hedge and minimize risk, especially tail risk.
  2. In an unfortunate turn for current retirees and those nearing retirement, our economy faces serious demographic headwinds. At the same time, tax increases and government-benefit decreases seem inevitable while life expectancy improvements mean a retirement that may last for 30 years or more.
  3. Markets may be extremely volatile during this period and, as in Japan over the past thirty years, entire decades may be “lost.” Between October 2007 and February 2009, for example, the S&P 500 stock index fell over 50% then almost doubled from its low through February 2011. The historical prices tracked by Yahoo Finance reveal that from 2000 through 2009 the broad market index fell over 25% (from 1,469 to 1,074), dealing buy-and-hold investors a loss of capital, time and opportunity. Buying-and-holding in roller coaster-like equity markets can result in entire decades of lost potential growth. Nor is capitulating and moving to the sidelines an adequate response: Most retirees cannot afford to miss snapback opportunities. They need to make money even in bad economic times and, especially, in secular bear markets.
  4. The Federal Reserve can intervene specifically to drive interest rates paid on savings as low as possible and keep them there for as long as needed. This means very low returns on bank deposits, Treasuries and investment-grade corporate bonds for the foreseeable future, driving investors to take on greater and greater risk even in fixed income instruments. But bond markets, including those for government and municipal paper, can be volatile and are not immune to significant losses. In fact, all asset prices may end dramatically lower when Fed intervention ends.
  5. Reflecting adverse demographic trends, slow growth and heavily indebted consumers, a “new normal” of below-average investment returns may have already set in to reduce the weighted average return on a portfolio of 60% stocks/40% bonds to levels below historical averages over the coming decade despite the potential volatility risk which, in effect, will have to be endured uncompensated. A more conservative portfolio consisting of 40% stocks/60% bonds will likely deliver even lower annual returns. In the new normal, the risk/return ratio is not likely to favor the investor, while low returns may necessitate dipping into principal.
  6. Research confirms that the primary risk that must be managed by retirees as they take withdrawals from their accumulated savings is “sequence” risk. Ignored at one’s peril, it reflects not the average return over a period of years, but the sequence of those returns. Some generations are lucky: they retire when share prices are low and cash out as shares rise into a market boom, so their savings can sustain a dream retirement with wealth left over. Negative returns in early withdrawal years can result in shockingly rapid asset depletion: unlucky generations cash out in such declining markets and their savings can be quickly depleted resulting in a nightmarish retirement characterized by insufficient cash flow and painful belt tightening.
  7. Retirement savings by definition are intended to be spent down over one’s life expectancy. They should be distinguished from legacy assets that are intended for wealth transfer to future generations. Historical studies of the past century conducted by Jim Otar have shown that from age 65, a sustainable withdrawal rate offering the highest likelihood of success in lifetime portfolio survival cannot exceed 3.6% per annum. Thus, if you are 65 and need income of $36,000 per year, adjusted for inflation to maintain purchasing power, you should have $1 million set aside to rest assured that you and your spouse won’t run out of money. Taking a higher percentage each year risks premature depletion even in good times; it can be a recipe for retirement disaster in bad.
  8. As advocated by Warren Buffet and other classic value investors, risk-management to achieve capital preservation is the first order of business when it comes to long-term investment success. As a corollary, Buffet-like investors deem it well worthwhile to forego some upside potential (even half or more) to increase stability of principal. This truism is even more fundamental to retirement asset management: Principal protection, stability and liquidity trump maximizing upside performance for core holdings dedicated to providing lifelong income that can grow to keep up with inflation.
  9. Since even bear markets rally and the most astute prognosticator may be wrong, an optimal core portfolio protects against market declines while participating in positive price movements even in extended down markets. Insulating the investor from loss obviates the need for market timing and circumvents the behavioral tendency to buy high, sell low and miss market snapbacks.
  10. In assembling a “core” retirement portfolio, ongoing counterparty risk must be continually evaluated and managed at the lowest possible cost to the investor. The Standard & Poor’s 500 Index (“S&P 500”) is an unmanaged, market capitalization weighted index of 500 widely held stocks, with dividends reinvested, and is often used as a proxy for the stock market and cannot be invested in directly. The term “black swan” refers to very low probability events that are major market shocks able to wreak investment havoc.

Equity Indexed Annuities (EIAs) are not suitable for all investors, but may provide part of the core retirement portfolio designed to help protect retirees from black swan events. EIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. EIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to age 59-1/2 may result in an IRS penalty; surrender charges may apply. Guarantees based on the claims-paying ability of the issuing insurance company.

In all cases, the retirement portfolio should be monitored and adjusted based on market conditions. Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. A positive (negative) Alpha indicates the portfolio has performed better (worse) than its Beta would predict.

Is Everyone in Westchester Rich? Westchester Magazine


Local Certified Financial Planner practitioner Nahum Daniels echoes the sentiment: “The statistics tell the story: A large number of people living in Westchester earn relatively high incomes and enjoy higher net worths, but not everyone would be considered ‘rich.’ You can still live well in Westchester without being rich. Can you do it on a budget? You can.”

Read the full story here: