7 Processes for Retirement Planning: CFDD 2011

Retirement planning is a process, not a product

Thornburg's Jack Gardner speaking at CFDD 2011. Thornburg's Jack Gardner speaking at CFDD 2011.

Retirement planning has been pushed as a product over the past several years, Jack Gardner, president of Thornburg Securities Corp. and managing director of Thornburg Investment Management said at the Center for Due Diligence’s 2011 conference on Tuesday. Advisors who focus on planning as a process rather than pushing a series of products, though, will get more assets.

Gardner outlined seven processes that comprise retirement planning and form a wall around a client’s nest egg:

  1. Diversification
  2. Cash flow reserve strategy
  3. Spending policy
  4. Tax-efficient withdrawals
  5. Sustainable withdrawals
  6. High and growing income stream
  7. Monitoring

The most important metric to coach boomers on, Gardner said, is their withdrawal or spending rate. Inflation is the biggest danger in retirement, Gardner said, and developing a reasonable spending plan, cash flow strategy and utilizing dividend strategies are important to guard against loss of income. Gardner compared retirees to endowment funds; both are tasked with preserving purchasing power as long as possible, but unlike endowments, retirees have a finite spending time frame.

As part of his endowment spending policy illustration (see chart, left), Gardner referred to the Yale Endowment spending policy. The concept, he said, is to establish a sustainable long-term spending rate and institute a smoothing rule that adjusts that spending rate annually. By using a 5% spending rate with a 90/10 smoothing rule (90% of the prior year’s spending plus 10% of the current value of the portfolio, multiplied by the 5% spending rate plus the annual cost of living adjustment), advisors can gradually adjust their clients’ spending to reflect portfolio performance, Gardner said.

Using a lifestyle model with a 6% spending rate, a retiree in 1973 would run out of income in less than 15 years, Gardner said. By comparison, an endowment model with the same spending rate would provide income for 30 years.

By reducing the spending rate just one point to 5%, income from a lifetime model increases to over 21 years, but using the endowment model exceeds 30 years.

Effective tax strategies are also important. An advisor can enhance the longevity of his clients’ portfolios by five years just by using tax-efficient strategies, Gardner said.

For retirees who insist on maintaining spending limits that are too high, Gardner suggested running a Monte Carlo scenario with them annually. If they aren’t persuaded to adjust their spending limits, have them sign the scenario and save it in their file.

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