Worried about running out of money before you run out of life? Who isn’t? What about income dependent on the vagaries of an increasingly volatile market?
Leave it to Harold Evensky (left) to give it to you straight. The president of Evensky & Katz Wealth Management, professor of personal finance at Texas Tech University and all around industry personality, can quickly boil down the complexity of ensuring sustainable income in retirement.
1. Squaring the curve — The assumption has always been that people grow sicker as they age, and will therefore spend less. No longer; Evensky refers to what’s known as “squaring the curve” where traditional age and health statistics intersect on a graph.
“People are living longer, and are healthier for longer,” Evensky explains. “From personal experience, I just went on a lovely cruise with my wife. I saw a lot of older people, and they had their walkers and whatever, but they were out there, and they were spending.”
2. Returns — Evensky definitely buys into PIMCO’s theory of the “new normal.”
“We are, and will be, in a relatively low-return environment for the foreseeable future,” he notes. “This means taxes and inflation will matter that much more. It’s independent of sequence of return risk. It used to be that returns were high so the tax wasn’t quite as much of a burden. Not anymore.”
3. Withdrawal — Acknowledging sequence of return risk, he says proper withdrawal rates and strategies are “a bit of the luck of the draw. When you begin taking them is increasingly important.”
4. Psychology — Shortcuts in investing, mental accounting and the “misunderstanding of the complexity of risk” are all increasingly problems.
“I had someone come in to see me after the technology bubble collapsed. He said, ‘I was up 80%, now I’m down 60%. I should still be up 20%, yet I’m underwater. How?’ I had to explain to him that the 60% loss was off the increased amount. He was a smart individual, but didn’t realize that.”
5. Interest and dividends — Contrary to conventional wisdom, and many advisor investment philosophies in recent years, Evensky thinks a portfolio of interest- and dividend-paying securities is “extremely dangerous.”
“Let’s assume you’re dependent on a 4% withdrawal rate. In order to get that today, you have to have a heavy concentration in long-duration, low-quality bonds. If interest rates go up, you get more; if they go down, you get less. How do you plan for that? We need consistent sources of income, not sources that fluctuate.”
6. Management of expenses — “We have no control over the markets, so let’s control what we can: expenses and the impact of taxes.”
7. Market timing — The last point is the seduction of trying to time the market, to which Evensky simply concluded, “it makes no sense.”
Check out Harold Evensky to SEC: Employ the ‘YOU’ Standard in Fiduciary Rule on ThinkAdvisor.