For retirees, investing in fixed income may not fulfill income or risk management needs, while investing heavily in equities may expose these investors to untimely amounts of risk. As Americans face this retirement income challenge, it is no wonder that running out of money in retirement is now of greater concern than public speaking.1
In this paper, we seek to answer one simple question: How can retirees provide for themselves when they no longer work? Our analysis indicates that the answer to this question lies in the proper calculation of a sustainable portfolio withdrawal rate, and the ability to manage three fundamental risk factors: market risk, inflation risk, and longevity risk. Successfully navigating these risk factors leads to a potentially increased portfolio withdrawal rate, with a high probability of success.
This paper has been divided into three sections, which work together in an effort to solve the retirement income challenge facing Americans. These sections are:
- The development of a transparent, mathematical approach to calculating a sustainable withdrawal rate.
- An introduction to the managed risk equities space.
- Strategies to mitigate three major risk factors facing retirees—market risk, inflation risk, and longevity risk— thereby increasing the overall sustainable withdrawal rate.
Key findings:
• The mathematical approach to calculating a sustainable portfolio withdrawal rate outlined in this paper confirms the traditional 4% Rule used by many in the financial advisory community.
• The use of managed risk equities provides investors an opportunity to manage market risk and generate income without large allocations to fixed income instruments.
• Addressing inflation via a contingent method allows investors to address inflation as needed.
• Combining risk managed equities with the contingent growth method of inflation accounting leads to the 6% Rule, while maintaining a high probability of success.
• While not critical to development of the 6% Rule, longevity risk may be eliminated through the use of deferred income annuities, without damaging a portfolio’s withdrawal rate.
• It is important to note there is no guarantee that an asset class, investment, or strategy will achieve its objectives, generate positive returns, or avoid losses.
