Stock Market Archives - Integrated Retirement Advisors

Interest rates, bond prices and inflation are related. Here’s how.


The Federal Reserve

“Part of the mission given to the Federal Reserve by Congress is to keep [consumer] prices stable–that is, to keep prices from rising or falling too quickly. The Federal Reserve sees a rate of inflation of 2 percent per year–as measured by a particular price index, called the price index for personal consumption expenditures–as the right amount of inflation.

“The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.”  ~The Federal Reserve of Cleveland

Interest Rate Risk

In general, low interest rates can be good for mortgage and other consumer loans because you will pay less to borrow money. However, low interest rates are not so good when you’re looking at the low interest credited on savings accounts and CDs.

But the main reason interest rate risk is considered a risk has to do with bond prices.

About Bonds

Bonds are basically fixed-rate loans with set maturity dates. Buying or selling them before maturity, when current interest rates might be higher or lower than the bond’s face value interest rate, is what affects their price.

In general, when interest rates go up, bond values go down. As bond prices increase, bond yields fall. Interest rate risk is common to all bonds, even U.S. Treasury bonds.

“The most important difference between the face value of a bond and its price is that the face value is fixed, while the price varies. The face value remains the same until the bond reaches maturity. On the other hand, bond prices can change dramatically.” ~Investopedia

Why You Should Care

Pre-retirees and retirees with money invested in the stock market often have the majority of their investments held in bonds after they reach age 50+ because in general, bonds are often considered “safer” than stocks.

A common principle used by some stockbrokers and bankers called “the Rule of 100” uses age to determine how much of their client portfolios are held in bonds versus stocks. The rule works like this: When you are 60, 60% of your portfolio will be in bonds versus 40% in stocks, when you’re 70, 70% will be in bonds versus 30% in stocks, etc. going up from there.

This shift to more bonds and less stocks as you get older happens automatically in many 401(k) “target date” funds as well.

Bonds Versus Bond Funds

Because the term “bonds” is often used interchangeably with “bond funds,” it’s important to know that some Wall Street experts consider bond funds to be correlated with stock market risk, and therefore not “safer.”

“A bond fund is simply a mutual fund that invests solely in bonds… An investor who invests in a bond fund is putting his money into a pool managed by a portfolio manager. Most bond funds are comprised of a certain type of bond, such as corporate or government bonds, and are further defined by time period to maturity, such as short-term, intermediate-term, and long-term. Some bond funds comprise of only one type…Still, other bond funds have a mix of the different types of bonds in order to create multi-asset class options.

“The types of bond funds available include: US government bond funds, municipal bond funds, corporate bond funds, mortgage-backed securities (MBS) funds, high-yield bond funds, emerging market bond funds, and global bond funds…Typically, a bond fund manager buys and sells according to market conditions and rarely holds bonds until maturity.

“In other words, bond funds are traded on the market, and the market prices on bonds change daily, just like any other publicly-traded security.” ~Investopedia


What’s Happening Now: The Headlines


  • Inflation Fears

“Inflation is near a decade low and well below the 2% level the Federal Reserve targets as ideal. The usual conditions for rising inflation—tight job markets and public expectations of rising prices—are glaringly absent. Yet anxiety about inflation is at a fever pitch, among economists and in markets, where long-term interest rates have been grinding higher since President Biden unveiled plans for huge new fiscal stimulus.” ~Wall Street Journal

  • Rock Bottom Interest Rates

“The Federal Reserve’s emergency rate cut back in March [2020], which dropped the benchmark interest rate to zero, is likely here to stay…the Fed publicly stated that even if inflation starts to pick up again amid the economic recovery from the coronavirus pandemic, it doesn’t expect to raise interest rates any time soon as the labor market rebounds. Wall Street economists predict that these rock-bottom rates may be around for the next several years. In fact, after the 2008 Global Financial Crisis, the Fed kept benchmark rates low for seven years. While this means that borrowing becomes cheaper for those who can get approved for loans, it’s not such good news for savers.” ~CNBC

  • Bond Yields Higher

“The 10-year U.S. Treasury yield climbed back above the 1.5% level on Thursday [3/4/21] after Fed Chair Jerome Powell said there was potential for a temporary jump in inflation and that he had noticed the recent rise in yields. The yield on the benchmark 10-year Treasury note rose to 1.541% shortly in afternoon trading. The yield on the 30-year Treasury bond pushed higher to 2.304%. Yields move inversely to prices.” ~CNBC

“If you hear that bond prices have dropped, then you know that there is not a lot of demand for the bonds. Yields must increase to compensate for lower demand.” ~The Balance

  • Long-Term Bonds Face Nearly Zero Upside

“Buffett is bearish on bonds. Why does [Warren] Buffet think that “bonds are not the place to be these days”? Yields on Treasurys are near historical lows, and investors locking in these low returns by investing in long-term bonds face nearly zero upside with significant downside if rates rise.” ~Think Advisor


To Recap: Interest Rate Risk / Bond Risk / Inflation Risk

  • Bond Risk: In general, when interest rates go up, bond values go down. Interest rate risk is common to all bonds, even U.S. Treasury bonds. A bond’s maturity and coupon rate generally affect how much its price will change as a result of changes in market interest rates.
  • Inflation Risk: Inflation risk is the risk that rising costs will undermine purchasing power over time. The Fed will raise interest rates if inflation rises.


Inflation risk, bond risk, and interest rate risk can be managed through strategies like portfolio diversification, insured solutions that offer inflation adjustments, and by proper financial and retirement planning.

It’s more important than ever to make sure you are protected from multiple risks as you get closer to or are already in retirement. If you have any questions about your situation, please don’t hesitate to call us. You can reach Nahum Daniels at Integrated Retirement Advisors at (203) 322-9122.





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:

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.

Planning for Market Downturns in Retirement



Beware retiring into the “best of times” (the longest-duration bull market in American history, reached in August 2018 after starting its climb in March 2009) because markets are cyclical.

What goes up must (eventually) come down as sure as night follows day, winter follows summer and bear markets follow on bull runs. When the stock market becomes historically expensive, as some metrics including the Shiller CAPE suggest today, research shows it’s often a predictor of below-average future returns that could last a decade or more.

Retiring into a down market will be especially painful for buy-and-hold investors taking withdrawals from their nest eggs. Consider an unlucky 65-year-old who retires on a stock portfolio worth $1 million and withdraws 4% a year adjusted for inflation. If, after taking $40,000 the portfolio loses 40% of its value in a downturn, he or she will have just $576,000 left to fund a retirement that could last 30 years or more. The tough choice: take another $40,000 at the start of year 2 and reduce one’s life savings by almost half over the first year-and-a-day of retirement (a result that might qualify as a catastrophe) or tighten one’s belt and take as little as possible from the portfolio in year 2 (and thereafter) to buy time for asset values to recover (there goes your lifestyle).

Since returns in the first five or ten years of retirement matter most in shaping the long-term outcome, the market’s run-up since 2009 and its potential retrenchment in the years ahead actually pose a tremendous risk to retirement portfolios going forward. Isn’t that ironic?

How to hedge? Conventional advice runs from cash to bonds to reverse mortgages, all imperfect solutions.

    1. Build a cash cushion into your nest egg and take a barbell approach. Set aside five years of living expenses (about $220,000 in our example) so you won’t panic or sell your stocks at depressed prices. Instead the cash buys time allowing you to remain calm in the face of financial calamity and await a recovery. The drawback is that the low returns on cash (effectively 1%?) will drag down your portfolio’s long-term returns. And what if the downturn lasts longer than 5 years? Or consider the obverse: what if the snap-back occurs quickly and over 20% of your portfolio is on the sidelines, missing the recovery entirely?
    2. Diversify between stocks and bonds and actively re-balance between them. Rather than revert to cash, use bonds because they can earn more than cash with much less downside risk than stocks. This is the classic “diversified” portfolio that balances stocks and bonds and keeps the ratio (60-40, say) intact through thick and thin. Thus, if you’re indexed to the S&P 500 in your $1 million portfolio and we get a repeat of the 37% drop experienced in 2008, your equity position will have been reduced to $378,000 and your bond position may have increased from $400,000 to about $422,000. Your total portfolio ($800,000) is now balanced 47% stocks and 53% bonds so your investment “policy” requires selling bonds and buying stocks to get back to the 60%/40% ratio. Theoretically, you’d be selling bonds high and buying stocks low, which is a good practice. Your portfolio, however, will still have taken a one-year loss of 20% and a $40,000 withdrawal would represent 5% of its value rather than the original 4%, reducing its projected duration. Or you can take less than your original $40,000 and reduce your consumption. Two mediocre choices.
    3. Use other assets to hold you over. Rather than deplete your nest egg, you can get cash from a home-equity line of credit or reverse mortgage or borrow from a life insurance policy. Of course, these options all cost money and represent dilutions of other asset values imposed by the vagaries of the stock-and-bond marketplace.

Or you can buy a fixed index annuity that protects against market declines so you avoid losses, enables you to remain invested to participate in a share of market gains from a snap-back and guarantees a lifetime floor of income that can grow to keep pace with inflation.

Shouldn’t you give it serious consideration?

Going Where the Research Leads


By Nahum Daniels, CFP®, RICP®


As a client-facing financial advisor (FA), I view myself as an intermediary whose job it is to communicate in the form of sound, actionable advice the latest findings in academic research and retirement theory unearthed at the institutes and centers of retirement studies. As for my pedigree, I’m a product of The American College of Financial Planning located in Bryn Mar, PA, where I earned its Retirement Income Certified Professional (RICP) designation. Amidst the hundreds of thousands of FA’s in the USA today, there are only 6,000 graduates of this relatively new program, with another 4,000 or so currently enrolled.

I can humbly report that, developed and taught by some of America’s most respected retirement experts, the RICP curriculum is non-trivial. As a CFP practitioner who has specialized in retirement planning for going on two decades, I felt I needed to earn and maintain the designation if only to make sure I wasn’t missing anything. I certainly owed that to my clients and any members of the public who could fall within hearing distance or reading range.

In August 2015, Wade Pfau, PhD/CFA, professor of retirement income in the PhD program at The American College, published the results of a quantitative analysis he painstakingly performed comparing immediate annuities to bond funds in retiree nest eggs. It was entitled: Why Bond Funds Don’t Belong in Retirement Portfolios. Pfau’s findings challenge one of Wall Street’s most fundamental dicta: that bonds provide ballast to a balanced portfolio and should therefore comprise 40% to 60% of a retirement portfolio. Instead, Pfau announced that a classic insurance product, the immediate annuity, is a more efficient, higher yielding and far more reliable alternative. Therefore, he concluded, the retirement nest egg should be invested in a combination of income annuities and stocks!

Building on those findings in a paper presented at the 2018 Actuarial Research Conference, Michael Finke PhD, Dean of The American College, presented the results of a study he conducted with David Blanchett PhD, Head of Retirement Research at Morningstar Investment Management, that calculated the increased stock exposure rendered “prudent” in a retirement portfolio thanks to the guaranteed income provided by insurance in the form of an immediate annuity.

Preconceived investment notions were further challenged in January 2018 when Roger Ibbotson PhD, Yale Professor Emeritus of Finance and the world’s leading authority on asset class performance from 1926 to present, announced the results of a study he conducted on the Fixed Index Annuity (FIA), a relatively new insurance product that helps preserve retirement assets from market losses while linking them to those same markets to capture a share of their upside potential. The FIA, Ibbotson reported, could out-perform bonds, especially in rising-rate environments like the one we’re in, and should be considered, he recommended, as an alternative for bonds in de-risking retirement portfolios.

If you’ve read my book, you know I recommend the FIA serve as the anchor of your nest egg’s “stable core” and that balancing a retirement portfolio today means combining insurance and securities—and not just stocks and bonds—in suitable proportion. Now you know the identity of some of my intellectual antecedents and why I’m proud to bring their message to you. I urge you to heed it.