"What I do is eliminate the need at the outset to figure out what percentage of fixed withdrawal rates is safe because I believe that even when you're trying to calculate that percentage, there are so many assumptions that go into it that it's hard to get the number right, and given what's at stake, I think my approach is a better approach."
Alfonso says that five years before his clients retire, he knows what kind of lifestyle they're comfortable with and wants to maintain throughout retirement. So he looks at required cash flow and builds a bond ladder that begins in the first year of retirement and gets replenished each year as bonds come off the ladder.
"The strategy is to make sure the face value of those maturing bonds add up to what we need in terms of ongoing cash flow. We know up to the penny what will be available in terms of reliable cash flow off the bond ladder, and in the years that stocks outperform relative to bonds, we have the option of not even taking advantage of the cash flow from the bond ladder."
Alfonso buys the bonds discounted, so he is looking for an internal rate of return and is not so much concerned with yield.
Fred Amrein, an advisor with Amrein Financial in Wynnewood, Pa., says that one of his firm's retirement withdrawal strategies is to control required minimum distributions. If the client has a lot of money amassed in qualified accounts, he is already thinking ahead to manage the withdrawals more efficiently before they retire, since the future tax code is uncertain.
"Their RMD at age 70½ could be a shock and will minimize the client's ability to control their tax bracket and other retirement costs," Amrein says. "One of our strategies is to withdraw income up to your current tax bracket limit and move it to a Roth IRA. This is a subset of a Roth conversion." He says it's not just a one-time expense but a process managed over time that allows the client to control his or her current and future tax brackets. He says it may also lower the client's contributions to Medicare, which is based on income and the tax on Social Security.
Mitchell Reiner, a managing partner of Wela Strategies in Atlanta, says that his firm has an income portfolio focuses on unique income opportunities such as closed-end funds, master-limited partnerships, energy royalty trusts, REITs, preferred stocks, convertible bonds and fixed-income ETFs. The strategy looks at macroeconomic factors to determine equity valuations and the interest rate environment and then allocates into sleeves: fixed income (through individual bonds and funds); closed-end funds; and alternative investments (comprising MLPs, preferreds, convertibles and REITs). These individual components are even further drilled down as the firm looks for the best premiums, discounts, spreads, international opportunities, etc.
"Typically these assets are not perfectly correlated with each other or the equity markets," says Reiner. "We focus on consistency of income above most else. For clients, we communicate that although we want to minimize fluctuations in principal, we are focused on getting a yield that is consistent and can potentially grow over time with equity prices and inflation. We still maintain a target yield of under 5%, but often times generate more than that."
Reiner says the firm has packaged this strategy into a model ETF called the "Aggressive Yield" portfolio that is available on multiple platforms. These models are run out of Wela, a firm he founded from his primary firm, Atlanta's Capital Investment Advisors.
What's Wrong With 4%?
Of course, there are other advisors who say that if you question the efficacy of the 4% rule because of the volatile market, you are, as the actress said to the bishop, doing it wrong.
Lee Munson, the chief investment officer of Portfolio LLC in Albuquerque, N.M., and author of Rigged Money, which will be out in December, asks simply, "What's wrong with 4%?" Instead, he rails against one of the medicines advisors have come up with to deal with uncertainty: Monte Carlo simulations that use historical returns and thus, he says, improperly frame the numbers. Such numbers can only pretend to be forward looking when they are in fact measuring the past, he asserts.