Spending Is Life!

In our last Value for Money Investing, we wrote about the concept of Gamma.  Gamma attempts to quantify the increase in investment returns from making “intelligent financial planning decisions” during retirement.   One of the key “decisions” is having a dynamic withdrawal strategy.  In simple terms, this is an adjustable plan for using the wealth represented by your investments.  A common rule of thumb (and I just hate rules of thumb) is to use a withdrawal rate of 4% of the portfolio at start of retirement (a static approach).  You then adjust this initial amount for inflation.  A dynamic strategy would adjust based on market performance or expected investor longevity.  Annually, you adjust your withdrawals to maintain portfolio survivability and changing mortality data.

The above observations about using a dynamic withdrawal strategy are correct and we embrace them, but as set out, apply to research bunnies interested in dying having spent the later part of their life slaves  to the different quantity of money (theoretically) available each year.

The Gratifying Harvest notion.  Our clients are people, not research bunnies.  Thus their lifestyle needs, each and every year, will drive the future resultant portfolio survivability, not the other way around.  The changing mortality data is for the population as a whole and my clients, being unique, will not die on that prescribed day.  In other words, we need our money to last until we are done with it, which might not be when we die.  We also need to use our money both unevenly and in a pattern very different than that prescribed by the research, to enjoy our life.  So, in practice, we do annually examine the portfolio performance and our client`s withdrawals to retest portfolio survivability and changing mortality requirements.

We want our clients’ money to last as long as needed to support enjoying their lives to the fullest.  Spending patterns are unique to all families and will never match the timing of the portfolio performance.  Your trip to China may well coincide with the year after the poorest results experienced by the portfolio.  Do you delay the trip until the portfolio rebounds, or do you go and then adjust for it in the future?  Will you be more active in your 50`s and 60`s or should you delay your dreams until your 80`s when the funds will be more certainly be available? The pattern of your life may well dictate that you need to use your retirement funds more in your 50`s than in your 70`s, to say support early retirement.  Government benefits kick in during your 60`s.  Many of our clients have a declining withdrawal plan that starts high and finish low due to this.  They are active as early seniors, but less active and less travelled as they age.

So your portfolio survivability per the mortality tables is dependent on uneven performance patterns that require adjustment to the withdrawals being made.

In contrast, your lifestyle needs dictate a withdrawal pattern that is unique to your family, uneven, ever changing and sometimes unforeseen.  Our challenge is to assist clients in matching THEIR needs to THEIR portfolio to obtain the optimal balance between portfolio longevity, portfolio performance and enjoying life.

Our clients are just like you.  Middle class families, with hard earned and hard saved retirement assets, which are essential to the enjoyment of their lives each year.   As an investment professional, I should be pleased to report, that in the last year their portfolio results were great and most achieved X% in their portfolios.  But that is not important.  The real proud moments came from their lives.  We had clients visit China, cruise waterways in Russia, explore Africa, relax in the Greek Islands, and so many more places.  Second homes were purchased in Florida, Mexico, and further afield.  Clients moved to sunnier locales.  Weddings were paid for.  Children received help with home purchases.  Universities were entered and left.  Golf games improved.  Sailboats, airplanes, RVs and fancy cars bought (no trains that I know of).  Life has been lived and FUNded.

Merry Christmas and Happy Holidays from all of us at Efficient Wealth Management Inc.