- An advisor must determine the amount of income an asset class or portfolio could provide in ideal conditions, creating a target withdrawal rate. This is where the 4 percent rule ends.
- The advisor should then determine how far the current portfolio or asset class value has deviated from its historical mean, which becomes the “TRU Factor”—mathematically, this is the inverse of the TRU Ratio.
- The advisor should then multiply the withdrawal rate by the TRU Factor to determine a safe withdrawal rate.
A fourth step is then included: The calculation can be repeated as often as needed: If the results say a higher paycheck can be taken, the withdrawal rate can be permanently adjusted upward, but no adjustments need to be made if the result is a smaller paycheck. It is also sufficient to use the initial TRU Method withdrawal calculation and adjust for inflation over time using the Consumer Price Index (CPI).
“It helps to put the problem in context,” says LaBrie. “Markets fluctuate. There’s no anchor and no way to assign a proper value. It could go anywhere. Yet reversion is never not happening.”
LaBrie is developing web and mobile tools to make the ValueGap and TRU Method easier to implement in complex portfolios and across asset classes.
“Every 100 days, 1 million people reach retirement age, and a big chunk of those people will have this problem—and they don’t even know it,” says LaBrie. “We have to convince people that the icebergs in the market are a problem, but that they can account for them to some extent in their planning.”