Retirement Investing - Integrated Retirement Advisors

Retirement Investing


Retirement Investing

Although we’ve been led to believe otherwise, retirement investing should not be defined in terms of the “total return” approach embodied in Wall Street’s “balanced portfolio” of stocks and bonds.

While suitable for institutional investors with very long time-horizons that can eventually absorb and recover losses, the retirement “nest egg” should be constructed to generate income to last a lifetime rather than to out-smart the market by out-performing its averages. That’s a very different design goal that requires a very different approach to portfolio construction—even in the best of times.

Market volatility and losses undermine a retirement portfolio’s yield or, in the lingo of the industry, its sustainable withdrawal rate. Earlier studies posited 4% as a “safe” rate of withdrawal (adjusted annually for inflation) that limited to 10% the odds of running out of money after thirty years. With the growing  prospect of outliving a 30-year retirement and with markets priced at historically high valuations on a dozen of metrics, retirement academics have tested the norms and have concluded that today  the prospect of future losses limits a “prudent” withdrawal rate to 2.8% if you want to minimize (but still not completely eliminate) the risk of premature depletion. That means you will need 43% more capital at inception to get the same result.


Of course, retirees may choose to withdraw what they need from their nest eggs (most do) and only tighten their belts later when market trends make it necessary. Or they may simply risk premature depletion (every retiree’s worst nightmare) figuring they’ll end up depending on the state or their children in later years or, if they’re lucky, dying before the piper must be paid.

So whether in the short term or the long term, retirement-portfolio losses that are unlikely to ever be recovered will require sacrifice in the form of lifestyle compromises. Hence the first rule of nest-egg construction is to avoid them. The challenge is to devise an efficient nest-egg portfolio with zero downside risk that doesn’t also abandon the potential for needed growth.

In our practice, we often overweight the fixed index annuity (FIA) to serve as the anchor of a “stable-core” strategy. Leveraging actuarial science, the FIA can yield considerably more from the outset than a balanced portfolio, especially weighed against a “prudent” 2.8% “safe” withdrawal rate, and its cash flow can be guaranteed to last a lifetime or two, no matter how long, eliminating the ever-present dread of depletion often endured by even affluent retirees. In addition, the annuity’s investment methodology protects principal against market declines while still participating to capture a reduced share of upside potential.  The latest academic research in retirement portfolio construction favors this integration of longevity insurance with investment expertise.  That’s why this relatively new hybrid is trending today and worth a careful evaluation.

If you have any questions about your own retirement plan, please reach out to us for a no-obligation consultation. You can reach Nahum Daniels, Integrated Retirement Advisors in Stamford, CT at (203) 322-9122. We look forward to working with you.