Conventional wisdom is being turned on its head in many ways these days. From politics to healthcare, there seems to be a revolution in thinking about how we arrive at the outcomes that are in our best interest.
Nowhere is conventional wisdom under fire as much as it is concerning your money, particularly retirement. New rules governing how financial advisors work with their clients requiring those advisors to work in your best interest is just one of the ways change is afoot in the world of retirement.
Recently, finance professors at the Wharton School of Business at the University of Pennsylvania rocked the thoughts of a group of advisors attending an executive education program when they made compelling arguments about how a retiree should invest their money. Their theories fly in the face of what many pundits say is “the proper way” to invest for retirement. “Out” are the thoughts of the typical “balanced” portfolio of stocks and bonds. “In” are time-segmented strategies that are targeted to provide money to be used during different phases of your retirement life.
Wharton professors were also highly critical of the “4% rule,” which is common lore among financial advisors who believe that you can “safely” withdraw 4% of your retirement dollars every year to live on without a substantial risk of running out of money before you run out of time.
This group is no run-of-the-mill collection of academics. The Wharton School is widely renowned as one of the top Ivy-league business schools in the nation. Some of the professors there are among the most sought-after experts in their field. Many of them couple their academic skills with “real world” experience, serving on corporate boards and investment committees putting to work the hypotheticals they study at the institution.
Their wisdom is anything but conventional.
At the heart of their contra-thinking are essentially three concerns:
- Markets are more volatile, and as a result people are more reactionary. In short, big swings in the market make people do the wrong thing, at the wrong time, and for the wrong reasons.
- Equity markets are driven by earnings. The average earnings per share of corporations have declined in recent years due to slow growing economies around the world. The Wharton group believes this could be a new normal, which has huge implications for folks who depend on the typical 60/40 mix of stocks and bonds promoted by most advisors and common to 401k plans.
- We have reached a tipping point in the bond market. After 30 years of falling interest rates, bond prices are at a cyclical peak and, realistically, have nowhere to go but down or remain flat. To quote one lecturer, “What are you going to do, invest in low yielding bonds, let inflation ravage your client’s purchasing power, and look stupid in 30 years?” Again, bad news for those who lean on the conventional wisdom of a 60/40 mix.
So, what’s a soul to do who is standing on the threshold of retirement
faced with the largest financial decision they will ever make?
Plan: The complexities of the issues outlined by the professors require thought and preparation. Retirement never has been a “set it and forget it” proposition. Committing the steps to achieve the outcomes you want in retirement require not only initial planning, but regular check-ups to adjust for future changes in the economy and the markets.
Protect: One of the strategies likely to set tongues to wagging among the financial pundits is the thought that annuities are essential to protecting income from the challenges in the financial markets. Establishing a foundation of regular, predictable, dependable income in retirement the scholars say is essential to a scenario where you are living without a paycheck. One professor endorsed annuities to transfer some of the risk of the financial markets and the paradox of “living too long” to insurance companies in much the same way you would use insurance to protect against risk in other areas of your life (i.e. health insurance, auto insurance.)
Expand: Given the condition of the financial markets, the academics put forth the idea that you should look beyond the conventional stock and bond markets and build as much as 40% of your portfolio in “non-traditional” alternative investments like private equity and real estate.
Engage: Not surprising, given their audience of financial advisors, the group endorsed the idea of seeking out well-experienced professionals to serve as a guide to help you make it through the challenges of retirement. Clearly, this group believes the challenges are more complex than “conventional wisdom” would have you believe.