Suppose that everything you know about planning is wrong, incorrect, not helpful to customers and, indeed, upside down. What then?

4% income for life 

There are at least two ways to deal with this popular idea. The first says that, when you retire, if 4% is taken from your pile of cash each year, you and a spouse will probably have enough money to survive for the two required lifetimes. The second way is built on the first and modifies the 4% idea by adding the inflation rate. You take 4% for the first year of retirement, then 4% times 1.03 (where 0.03 is the headline rate of inflation) for the second year, and 4% times 1.0x for the third year, and so forth. Chances are this will work, too. This idea is illustrated via Monte Carlo simulations, through programs like Jeff Manry’s BetaVest and through the seminal work of Bill Bengen. (Both Manry and Bengen are CFPs and planners in Georgia and California, respectively.)

However, Som Basu takes a thoughtful look at the idea of when the money is needed, with his AgeBander software, which calculates such things as leisure expenses early on and additional health care later. Basu is the director of the California Institute of Finance at California Lutheran University. AgeBander software is his separate venture. The software works on determining what is needed, when, and how to manage the funding. It’s available in a personal consumer version or a pro edition for financial planners.

Likewise, SunAmerica, in its investment annuity, allows people to take out more money than other companies at the beginning of retirement. This higher yearly income (usually paid out monthly) recognizes that retirees, on average, spend more in the first decade of retirement than they do in later years. SunAmerica reckons that they should be able to have more money then, so it provides guaranteed income that way. It structures its annuity payouts so retirees take out more in the beginning, and then the income reduces later, when as much money isn’t needed.

Basu’s AgeBander and SunAmerica’s investment annuity ask this question, approximately, of the 4% rule: “Wait a minute, here. Just wait a minute. Do people really spend this way? Is this how they need to receive money?” And here’s the answer: probably not.

So, you may do better designing for a customer to have more income in the beginning of retirement. It’s upside down from the usual inflation-driven argument.

And don’t just think about 10 years. Your customer may have a different timeframe entirely. Really turn things around and look at them backwards, forwards and even upside down. 

Don’t use variable annuities for IRAs

This was a popular cause of the SEC and the National Association of Securities Dealers (before it became FINRA). The idea was that a customer would get no benefit from the tax breaks afforded a non-qualified annuity if he used it for qualified funds. But, what about the fact that many of these annuities offer income forever for a husband and wife, even if they’re in one or the other’s IRA? I have great respect for both the SEC and FINRA, but sometimes I fear that they know little about investing. (How many CFPs, ChFCs, CFAs or finance degree graduates do these organizations employ? Harry Markopolis said none, which is arguably one of the reasons Madoff was successful.)

Clearly, if you have a required minimum distribution-friendly investment annuity, one that says, for example, that it will pay 5% for life and that it’s RMD-friendly, you have Nirvana. Why? Because it will pay 5% for the rest of your life and your spouse’s life, but, if the required minimum distribution amount is greater, it will pay that amount. (The 5%, or whatever percent, is typically an annually guaranteed amount set by a guaranteed withdrawal benefit built from the higher of market value or a minimum growth rate.) Once the contract runs out of “real” money, it will still pay a percentage of the income benefit, set years ago, and the need to follow RMD rules will cease. So what? Receiving good income, based on previous deposits and growth, makes one wonder: who cares that the “real” money is gone? What could be better than income forever?

And what about death benefits inside investment annuities? Some of them are quite creative and give a survivor options. He or she may continue income, take in cash or even reload the contract with the death benefit, whichever is best. Ohio National, for example, will permit two reloads, and so it is possible, if two spouses die in order before age 94, that beneficiaries will get the deposit amount or income benefit base again.

So, annuities can be an IRA’s best friend, right? It’s another upside-down situation.

Indexes are the way to invest


Had you bought the S&P 500 index in 2001, you would have been very unhappy last Dec. 31, yes? The S&P 10-year result was flatter than a pancake. Of course, you could have purchased some mutual funds that would have been worse than not having gained; some much worse. But the thesis, espoused for years by John Bogle and others, says that indexes will perform better than most fund managers.

Clearly, the S&P and the Dow were not anything to write home about for the last 10 years. On the other hand, a well-managed mutual fund would beat the heck out of the S&P or the Dow. (American Funds has a number of them. James Balanced: Golden Rainbow, Templeton Global Bond, Franklin Income, Fidelity Advisor Strategic Income, Ivy Asset Strategy, First Eagle Overseas or Global, and BlackRock Global Allocation aren’t bad either.)

This does not mean that Bogle is wrong. It just means that good managers for the last 10 years beat the heck out of flat-lined indices. Lots of bad managers had very poor results.

There’s a case to be made for active management of investments, too — kind of a tactical when-to-get-in and when-to-get-out approach. Since good fund management may — and did, over the past 10 years — beat indexes, there is a still case for buy and hold. (A cursory look at Berkshire Hathaway, the poster stock for buy and hold, suggests a return of a little less than 7% for the last 10 years, far below the norm but certainly better than flat.) 

Tactical vs. index and buy-and-hold investing


The tactical approach was covered last year in my column devoted to The Sherman Sheet. If you are interested in the hows, whys and wherefores of tactical, please check out or phone Bill Sherman’s right-hand man, Gordon Case, at (800) 741-5164. The idea, of course, is to know when to be in and when to be out of the market and how to invest in each instance. Bill Sherman does this well and has a range of programs that have expanded dramatically since the column.

Upside down

There’s nothing wrong with the 4% paradigm, buy-and-hold, index investing, tactical or anything else, is there? But it’s helpful, each time you visit with a new customer or review an old customer’s plan, to turn things upside down and measure each possibility to find the best way for the customer. If your customer needs 8% income for 10 years and then 3% for the rest of his or her life, giving him or her 4% from the get-go is kind of off the mark, isn’t it? So, every day, think straight, okay? And then, for a while, turn everything upside down and think about it hard. Give the exercise some time. See if parts of the plan might look better upside down.