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Retirement Income Redesigned: Master Plans for Distribution -- An Adviser's Guide for Funding Boomers' Best Years (Bloomberg Financial)

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This collection of twenty essays on retirement planning shifts the focus of much of the current literature from the accumulation of assets to their distribution. "Retirementality" - how we think about and live out retirement (Anthony) - is being redefined by a generation who are living years longer than their predecessors. Indeed, "longevity risk" is one of the central themes of this book. As defined benefit pension plans disappear and the viability of social security is debated, the net reality is that longer living retirees are left with fewer streams of guaranteed life-time income. Making that nest egg last is a challenge. Failure to do so is "the probability of ruin" - to use Milevsky's indelicate phrase.

A number of these contributors see annuities as integral to generating a guaranteed life-long stream of cash. Carey and Dellinger (and Milevsky elsewhere) maintain that investment returns produced by an annuity will always be superior to identical investments outside an annuity because of the "mortality credits" from other terminated annuity policy holders which are factored into the projected income. A chapter on reverse mortgages presents an evenly balanced discussion of this additional source of income for retirees. Considering that half the population who reach 65 may need some form of expensive institutional care (Greenwald), supplemental streams of income may also prove useful to pay for a long-term care insurance policy.

"Sustained Withdrawals" (Benge) seeks to determine a "safemax" - the maximum, annual withdrawal percentage rate from a retiree's accumulated wealth during this "decumulation" (Katz) phase. Determining this rate is another key theme in this collection. The rub is that relying solely on historical average rates of return and conservative withdrawal percentage rates mean little to a portfolio's survival if the sequence of market returns is negative in the early years of retirement. Benge's research looks at different withdrawal rates, asset mixes, various timing strategies, and adjustments to the withdrawal rate when it is a goal to leave nest egg assets as a bequest. Meanwhile, Stanaslovich in "Creating Portfolios With Lower Volatility" raises the bar with a gloomy projection of low returns for a variety of asset classes into the next decade.

This book should be read by financial planners, brokerage advisers working with retiring clients, and informed investors who want to manage their own affairs.

I have read over two dozen books on investing and retirement planning and this is among my favorites. First, there are few books which talk to the subject of distribution (as opposed to accumulation) strategies. Second, the authors have chosen to allow other experts to contribute to their book - 25 of them to be precise. So you are not just getting the advice of one or two people, but the opinions of over two dozen renowned experts in the field. There is a tremendous amount of wisdom contained in the chapters.

As anyone who is a student of investing and retirement planning will know, Harold Evensky is quoted routinely and widely recognized as an expert in his field. Simply getting his advice is more than worth the price of admission. An example is the Evensky & Katz Cash Flow Reserve Strategy (E&KS) which is discussed in chapter 11. I have no doubt I will use this strategy in my own distribution planning.

Also not to be missed in the work of Bill Bengen on sustainable withdrawals, which is presented in chapter 13. Anyone who is contemplating managing their own cash flows in retirement (and even those who entrust this to others) should not miss Bill's views and opinions. He is arguably the leading expert on sustainable withdrawal rates in the financial planning business. I would highly recommend that you also consider purchasing his book, Conserving Client Portfolio's During Retirement, in addition to this fine work. Fortunately that book has recently become available on Amazon so it is now easy to find and obtain. I purchased my copy about 9 months ago and had to order it directly from the Financial Planning Association.

While you may not agree with every opinion expressed in this book, it will certainly get you to thinking (perhaps outside the box) and pressure testing what you think you know.

I'm sure I will use it as a constant guide in managing my own finances.

Wow, I have read over 200 books about investing.....but never have I seen such a collection of valuable information about the distribution phase of investing in one book.

Twenty-five different authors contribute their own chapters covering about every aspect of the distribution phase.

I have heard both Evensky and Katz speak at the Chicago Financial Advisor Symposium, and they are both long time practitioners in the financial planning industry.

Of today's Americans who are over age 85, two-thirds of them have less than $100K in non-home assets.

On page 82, there is an interesting chart showing that at the 4% SWR level, asset allocation does have an impact on the probability of exhausting a portfolio. But once you get to a 6% SWR, asset allocation has virtually no impact on the probability of exhausting a portfolio.

On page 84, the author of this chapter argues that luck has far more impact on portfolio survival than asset selection, asset allocation, and management costs. The same author also recommends only re-balancing your portfolio every 4 years (each Presidential election year)

Pages 88-89 have 2 excellent charts which show the maximum SWR if your stocks get the same return as the DJIA......or the DJIA + 2% for a diversified portfolio.

For the case of your stock return equal to the DJIA:

40 years
30% stocks
25% bonds
45% TIPS
SWR = 3.1%

For the case of your stock return equal to the DJIA + 2%:

40 years
35% stocks
25% bonds
40% TIPS
SWR = 3.5%

The author of this chapter also develops an index for determining how much of a portfolio should be used to purchase immediate annuities. Although the author does not show how he derived his formula......I think this is his derivation process:

RWR = SWR * (1-MA) + MA*AR

Where RWR = required withdrawal rate
SWR = safe withdrawal rate
MA = percentage of portfolio to annuitize
AR = immediate annuity payout rate

In other words, your required withdrawal rate can be made up of the SWR applied to the portion of your portfolio which is not annuitized.......plus the immediate annuity payout rate applied to the portion of your portfolio which is annuitized.

Applying some algebra re-arranges this formula to:

MA = 100 * (RWR - SWR)/(AR - SWR)

If MA < 0, then no need to annuitize.

If MA is 0 to 100, then MA is the percentage of your portfolio which should be annuitized.

If MA > 100, then you should 100% annuitize.

I have seen different academic papers suggesting using 10% to 50% of your portfolio to purchase immediate annuities, but I have never seen a formula for suggesting what percentage to annuitize.

In the Monte Carlo chapter, the authors suggest stress testing a distribution plan by changing from average returns to making the first two years of distribution negative stock market returns. They suggest sometimes then using traditional Monte Carlo analysis. I wondered why even bother with the first two years of negative returns analysis versus just using Monte Carlo.........but my guess is that most investors can understand two successive bad years in the stock market.........but they probably won't understand Monte Carlo.

Bengen's chapter on SWR's is excellent. Bengen is the father of the 4% SWR rule. His research shows that the optimum retirement portfolio has 60 to 65% stocks. He also shows the impact on SWR from:

-adjusting spending to the annual return of the stock market
-the amount of inheritance to leave
-more diversified portfolios than just the S&P 500 and intermediate bonds...
...he shows a mix of small and large cap stocks

The Louis Stanasolov chapter starts out with the famous quotation, "If you are not losing money somewhere in your portfolio, you are not diversified enough."

He points out that from 1966-1982, the S&P returned 6.73% while inflation compounded at 7.24%.

Stanasolov is predicting very low stock and bond returns the next 10 years. He predicts stocks will be low because current PE ratios are the 2nd highest in history. He predicts low bond returns because interest rates are historically low. He recommends 8 funds which are mostly long-short funds in real estate and commodities.

The reverse mortgage chapter is a good primer on reverse mortgages. Most academics are already predicting that since Baby Boomers under-saved for their retirements.....that most Boomers will have to use reverse mortgages. The authors correctly point out.......that due to their high costs.....reverse mortgages should be a last resort.

The chapter on immediate and variable annuities says the rule of thumb for immediate annuities is 20% to 50% of your portfolio. The authors point out that immediate annuities do not help people with very low net worth......and high net worth does not need them....so best application is for people in between these two groups.

I am a fan of low cost immediate annuities for some situations. I was disappointed there was no recommendation for low cost immediate annuity providers like Vanguard or Berkshire.

I am not a fan of variable annuities. The author forgot to point out the average annual expense of variable annuities is around 2%........and the policies and fees are so complicated that it would take a Philadelphia Lawyer to figure them out.

Another item the author forgot to point out on immediate annuities is that most state governments only insure annuity recipients to $100K annuity policies. Check your state for its limits. Most experts recommend buying less than $100K (or the particular state limit) in immediate annuities from different insurance companies to avoid the insurance company bankruptcy problem.

I agree with the author of the chapter on software for the distribution phase of investing. I find it hard to believe there is no standardized methodology for analyzing the decision on when to retire.........and no standard methodology to develop a plan for maximizing income during retirement. Maybe as the 67 million Baby Boomers begin to retire, this demand will drive improved software for the distribution phase of life.

All in all, this is an excellent book with regards to the distribution phase of life. I thought there were several thought provoking chapters on many aspects of the distribution phase.

In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.

If you are still in the accumulation phase of life, these books on investing may help you slowly grow wealthier:

The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing

The book is a series of articles by different authors. It is only appropriate for professionals or trained amateurs in the field. Quality is uneven. The best is the editors one article which is worth the price of the collection.

When I retired 10 years ago I was faced with surviving on an essentially self-managed traditional IRA and Social Security. I had/have a financial planner, but have found most of the profession (except those perhaps affordable by only the very wealthy - I've no experience of them) almost as in the dark about the withdrawal stage as I was. I ended up doing an intensive year of self-education in order to vet the advice I was getting. Still, both I & the planner made some mistakes, but the IRA survived both the 2000 tech crash & the current one relatively intact.

Things have gotten a little better in the profession, but still, after a recent round of study prompted by the fact that I'm facing the dreaded RMDs in 2011, I've still got the impression that the financial planning & advice profession is just beginning to really get their heads around the withdrawal stage problems looming for the Boomers and almost-boomers like me, in view of the fact that many if not most of us are not going to have the luxury of using our IRAs as 3rd tier discretionary income, but for half or more of basic income.

And one of the areas I've found the literature most deficient if not clueless is the problem of RMDs for those of us heavily relying on an IRA.

The problem is, RMDs, if you take the inverse of the IRS's divisors, actually represent an unsafe withdrawal rate within about 4 years (>4%), and then escalate as if under an increasing rate of inflation. (Of course, DUH, the IRS wants you to go broke according to their one size fits all schedule, regardless of what your health, gender and genes are).

What that does to people like me who are taking out a safe withdrawal of less than 4%, is we are forced to take a taxable income stream in excess of what we currently need (in my case almost double what I need), which will result in more of your Social Security being taxable, a bite of the excess if you invest it (at your marginal tax rate), and possible exhaustion of your funds sooner than you thought under the "safe withdrawal rate" scenario for the life of the portfolio (ignoring the RMD effect).

And the literature totally ignores this problem, specifically How do we manage that excess cash flow in a tax efficient manner to conserve as much of it as we can until we DO need it? Because all the studies and advice are of safe withdrawal rates and ignore what the RMD's can do to you by exceeding the "safe rates" and possible forcing you to take out more than you planned on, along with the tax consequences of the excess and how to manage it.

This book still doesn't address the potential RMD problem, although the chapter on RMDs does mention "forced withdrawals" in passing (if you're paying attention, it can alert you). (The RMD chapter is good; I'd supplement it with Nolo Press "Taking Your Money Out" book, get the latest edition.)

Other than that, I found the material in this book enormously helpful and rate it among the best I've found so far. If you are self-managing your retirement funds, even with an advisor, this is a good book to study, and maybe get your advisor to read it too. Good solid stuff with a refreshing absence of the sort of hype and self-serving nonsense you find in too much of the "retirement planning" literature.

As a recent retiree, who is not a professional financial planner, I found this book very helpful in understanding the "technical" details of various financial planning tools. I was particularly interested in Monte Carlo analysis (which I use) and how this tool can be used to objectively (albeit not in the most easily understandable form for a lay person) quantify my investment portfolio risk.

It was also very interesting in how the Monte Carlo tool is being misused to evaluate risks other than simple investment portfolio risk. I would agree with the authors conerns about how certain financial planners are trying to use Monte Carlo analysis to evaluate risk far beyond the investment portfolio.

Traditional financial planning advice would suggest an ultra-conservative investment strategy high in fixed income securities. For those willing and able to accept the variablity of the stock market, a significantly higher level of income can be generated with little additional risk. Monte Carlo is the tool (properly used) to evaluate investment strategies.

I have been reading retirement and investment books extensively over the past 2 years (Graham, Gibson, Slott, Stein etc.) and while some have touched on saving for retirement, few have touched on withdrawal strategy. In this book, Harold has gone to great length to spell out the retiree's psychological and economic needs, and offers up excellent options to address both. That section, plus the other fine chapters by other authors, make this a must-have book for the enlightened counselor.

The way it is written suggests that the book has been written for CFP's but it has very useful information for anyone who wants to do their own financial planning. Some chapters give very practical and specific information and others are more general and philosophic.

Although this collection of articles is aimed at financial advisers, informed individuals who wish their own, independent, sophisticated information regarding income from investments during retirement should find this book extremely useful. The article on Monte Carlo simulations is worth the price of the book. This is by far the most valuable and informative book on retirement income I've found.

This is a great book for the knowledgeable self guided investor or investment advisor seeking better ways to evaluate the risks associated with someone outliving their portfolio.

If you have been successfully making your own investment decisions, but are wondering how best to plan for the distribution phase of your life: get this book.

The authors offer a wide variety of perspectives backed up with data, case studies and thoughtful analysis. For example, in this book you'll learn why Monte Carlo analysis by itself is not the best way to assess whether you will outlive your portfolio.

Many people know the basics of how to create effective plans for accumulating wealth. However, few are knowledgeable about how to assess and create effective distribution plans. This book is a must read whether you are doing your own retirement planning or working with an investment advisor. Get this book if you are in retirement or 5 years or less away from retirement.

The only thing I found missing were specific software recommendations, but if you pay attention you will find a few options discussed throughout the book.