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Putnam's Harlow Surprised By 10% Optimal Retirement Equity Allocation

June 30, 2011 • Page 2 of 2

The post World War II economic boom was created by Depression era folks who were transformed by hardship into great savers. They earned the right to enjoy what our collective consciousness now defines as a normal modern retirement, but they were also lucky. The U.S. was the only developed nation left standing with its infrastructure intact in 1945. Sadly or not, they may be the only generation in history to enjoy this kind of retirement. In a nod towards that generation, one of Harlow's key findings is that, during the accumulation phase, savings patterns trounce asset allocation decisions as a predictor of success.

For the past 30 years, the U.S. financial markets saw an unprecedented 18-year bull market for financial assets followed by the last 11 years of miserable returns. My own guess is that we are headed into an era that won't look anything like the 1945-1980 period or the 1980-2011 period.

Last year I interviewed one of the profession's sharpest advisors, Oxford Financial Group CEO Jeffrey Thomasson, who remarked that it approached lunacy to invest 70% to 80% of a wealthy 70-year-old's assets in equities. He may well be right, but I don't see how folks can allocate 80% of their assets to fixed-income vehicles-which Thomasson did not advocate-at a time when interest rate risk looms as large as it does today. It might make sense for a 90-year-old, but as other advisors have noted, at that point, many financial planning clients are at least partially investing for the next generation. Harlow freely admits a more affluent retiree with, say a 3% withdrawal rate, can afford more equity exposure than the average retiree.

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Bradengl 12 years ago

Tough to predict the next 25 years w/o reg changes

After what was called the "tech bubble" from a decade ago I firmed up what I discuss with clients concerning retirement distribution planning and since have discussed retirement spending in 3 pots of money... core expenses like mortgage, insurance, utilities & insurance plus food and medical expenses that need to be met every month, quality of life expenses on what they enjoy doing that can be controlled when need be and "frills" which are things that they do because they can afford to without worry. I also tell clients that giving money to their children or grandchildren is a "frill expense". ALL CORE EXPENSES IDEALLY NEED TO BE COVERED BY STABLE SOURCES OF INCOME including defined retirement plans, social security and possibly some kind of annuity or other assured form of income flow if possible. Quality of life expenses and any frill expenses are covered from the equity/investment income portfolio that distributions can be controlled ideally. I also emphasize that the "plan" needs to have a "cash bucket" that contains 12-24 months in supplemental income normally skimmed from the investment portfolio so that when the market drops in value for more than 90 days the distributions from the portfolio are stopped and supplemental income is drawn from the "cash bucket" until the markets start to recover so additional damage is not done to the equity/income portfolio at a time when they are losing value. By making this cut off at the 90 day point it eliminates most 5% declines and what could be categorized as "market timing" As the market recovers ... fill the cash bucket up for the next time (there will always be a next time) My country boy logic says that this process improves the survivability of the equity portfolio and reduces the retired clients reaching for the panic button. I forgot the regulatory part of the discussion. Since markets are an auction market and the price of equities is determined by the balance between buyers and sellers in my humble opinion the regulators need to implement something to control the "naked shorts" generating a significant portion of the volatility. You don't need to be a rocket scientist to see the naked shorts take down the market at the end of most weeks and then they cover those shorts before Wednesday of the following week. That is nothing but speculators impacting normal investors ... the second related issue is all the electronic trading floors generating millions of trades a day and impacting the normal investor. In the case of futures ... what would the price of commodities be if all buyers of futures had to be able to take delivery of the commodity they are speculating in. Fix those things and the next 25 years could be much better than the last 25.
Bradengl 12 years ago

Tough to predict the next 25 years w/o reg changes

After what was called the "tech bubble" from a decade ago I firmed up what I discuss with clients concerning retirement distribution planning and since have discussed retirement spending in 3 pots of money... core expenses like mortgage, insurance, utilities & insurance plus food and medical expenses that need to be met every month, quality of life expenses on what they enjoy doing that can be controlled when need be and "frills" which are things that they do because they can afford to without worry. I also tell clients that giving money to their children or grandchildren is a "frill expense". ALL CORE EXPENSES IDEALLY NEED TO BE COVERED BY STABLE SOURCES OF INCOME including defined retirement plans, social security and possibly some kind of annuity or other assured form of income flow if possible. Quality of life expenses and any frill expenses are covered from the equity/investment income portfolio that distributions can be controlled ideally. I also emphasize that the "plan" needs to have a "cash bucket" that contains 12-24 months in supplemental income normally skimmed from the investment portfolio so that when the market drops in value for more than 90 days the distributions from the portfolio are stopped and supplemental income is drawn from the "cash bucket" until the markets start to recover so additional damage is not done to the equity/income portfolio at a time when they are losing value. By making this cut off at the 90 day point it eliminates most 5% declines and what could be categorized as "market timing" As the market recovers ... fill the cash bucket up for the next time (there will always be a next time) My country boy logic says that this process improves the survivability of the equity portfolio and reduces the retired clients reaching for the panic button.
ktucker 12 years ago

It's all academic

Simonoff is right about one thing for sure: the next 25 years in the investing world will not be like the last 25. Nor like any other time period the academics have studied. No one can predict the future, and one has to be very careful in drawing any conclusions or in taking practical actions based on any kind of academic study. Does Modern Portfolio Theory ring a bell?
jrpower 12 years ago

Retirement Equity Allocation

I was similarly astonished at the finding. After careful reading however, I was less put off. What I have found is that most studies use a general model of investments and not a carefully thought out plan of investment accounts, withdrawal rates, etc. I always advocate a person entering retirement having two to three years of "cash" (money market, CD, ultra short bond fund, etc.) so that they won't need to draw down their investment accounts and experience sequential return risk. They can ride out a down cycle and replenish cash when the market permits without disastrous effect. They can also invest more heavily in equities for those portfolios that might not be touched for several years if ever (like Roth IRAs). That approach worked very nicely during the 2008-2010 period which would have been a disaster from a sequential return perspective whether in equities or in bonds. A planned approach can sustain much higher equity allocations. When inflation is considered, the 10% equity approach will almost always mean a reduction in retirement lifestyle, and much quicker than most people realize.