Phil Lubinski’s Retirement Security Advice for Boomers: A Host of Insights Which Are Seldom Communicated Effectively to Retail Customers
Occasionally we have the good fortune to meet someone through business who becomes very special to us. Over my 30-year career I’ve been blessed with my share of such relationships. None, however, have I come to admire more than Phil Lubinski.
Phil is a Certified Financial Planner who is based in Denver. I met him several years ago at a seminar where he presented to 250 retail customers on the topic of income distribution planning. This is a subject Phil knows a lot about- maybe more than anyone else in terms of his hands-on experience with retirees. Since 1984, Phil’s practice has been exclusively devoted to retirement income. That year he developed a time-weighted asset allocation model which he consistently and successfully implemented with retail clients for decades; that model became the foundation for The Income for Life Model™ program developed by Phil and Wealth2k in 2003.
Phil’s success in distribution planning led him to many consulting engagements for teaching other advisors how to implement his strategies. While consulting with Allmerica Phil was instrumental in the development the Post Retirement Navigator software marketed by Financial Profiles.
Today Phil devotes a portion of his time to speaking at industry conferences as well as ongoing training of hundreds of financial advisors in the investment and tax strategies necessary to properly engage in income distribution planning.
Phil, who in my judgment really is “The World’s Greatest Living Expert” on distribution planning. was kind enough to let me reprint the following article he wrote for Boomer clients:
BOOMERS:
Do We Have Enough Gold…
for Our Golden Years?
By Philip G. Lubinski, CFP
Co-author, The Income for Life Mode™
The largest population in history is about to transition into retirement (the wealth distribution years) and we better be ready because we have challenges unlike any prior generation. And, guess what, every financial services company and advisor is suddenly our best friend. Why, because we are 76 million strong and control an estimated 12-15 trillion dollars, that needs to be managed to provide a lifetime of income. Every industry from diapers… to baby food… to blue jeans…to automobiles has made fortunes catering to our needs and desires. Now it is the financial services industry’s turn and they’re frothing at the mouth. Retirement income models are sprouting up all over the country and we need to pick one that will work for us. Which one will be the best….unfortunately, none of us will know until the last boomer dies. What are we facing that no generation before has?….
1. broken promises….corporate pensions are failing at unprecedented levels and a day doesn’t go by that we wonder about Social Security’s ability to continue
2. longevity…. We are projected to live longer than any generation before us
3. medical costs that are bankrupting the average health care facility and passing through premiums to us that seem to have no limit
4. inflation…remember when a new mustang was $3,500 and a gallon of gas was 32 cents
Yet, we want to be more active in retirement. And now everyone and their brother has an investment model that promises to make our money last as long as we do. So how do we choose the strategy that is best?…….first and foremost, forget all the hypothetical theories and spreadsheets with future economic projections. Look for a model that has a successful history and deals with what we know to be true, not what someone is forecasting based on a lot of academic psycho babble. Also, look for an advisor who walks the talk and puts their own personal wealth in those products and strategies that they think are so good for you. Make sense? If so, read on.
No matter how much we analyze, forecast and hypothesize there are only certain things that can be declared irrefutable. The following 10 points are “truths” we can be certain of as we develop our retirement income strategy.
“The Ten Truths of Retirement Income Planning”
1. Historically, over long holding periods small cap stocks have outperformed large cap stocks… which have outperformed bonds… which have outperformed cash.
2. Over the long term there is an expected mathematical “spread” between inflation, stocks, bonds and cash.
3. There is no empirical evidence that would suggest that bonds with long term maturities adequately reward investors over bonds with short term maturities.
4. No retiree can know exactly what their income needs will be beyond 5 years.
5. No retiree knows when they will die.
6. No one knows what the future tax rates will be.
7. Systematically adding to a growth oriented portfolio during market downturns typically rewards the investor, while systematically withdrawing from a growth oriented portfolio during market downturns typically hurts the investor and could potentially destroy the portfolio.
8. Greed and Fear are emotions that have historically hurt individual investor returns.
9. Strategies for successfully distributing retirement income are different that those for successfully accumulating retirement wealth.
10. Individuals who employ personal coaches typically make
more progress than those who try to do it on their own.
For example, you can Monte Carlo test, stochastically analyze, historically research and run probabilities until you’re blue in the face. The fact is, over long periods of time small stocks have outperformed large stocks. Large stocks have outperformed bonds and bonds have outperformed cash. So, if you predicted that large stock portfolios would earn 10% at the end of 20yrs and they only did 8%…so what. Nobody else got 10% either, but they still would have done better than if they had invested in bonds or cash. Would we have as much wealth as we thought we would…of course not, but we wouldn’t be broke either. UNLESS, you made the fatal mistake of drawing income from the stock portfolio based on the 10% assumption.
Understand that the only way to achieve a 10% rate of return is that some years you make 20% and others you lose 10%. If you make the unfortunate mistake of drawing income at the same time the market is losing money then the combination of the two could drive your portfolio so low that no matter how good the next few years might be, you may never recover. When your growth oriented investment is reinvesting rather than distributing income the losses don’t hurt, they get averaged out in the end.
Most spreadsheets assume growth is linear, when in fact it never has been, nor ever will be. Consequently, the only reliable method of achieving higher rates of return is to leave the account alone and reinvest all of your earnings. So, where does your income come from??? An account that has no market risk….like cash. Are you beginning to understand the importance of identifying how much of your wealth is needed for income in the short term vs. how much you won’t need to tap for income until further down the road. Just how far down the road will determine the asset allocation for that portion of your money, i.e. if I don’t need the income on some of my money for 5 yrs. I could put that into something with a Bond orientation… 10-15 yrs. a large company stock orientation… 15-25 yrs could now be invested in something more aggressive like smaller company stocks. What should start becoming self evident is the importance of compartmentalizing or segmenting your money based on short, medium and long term needs. Any model that would suggest differently makes absolutely no sense.
One could argue the merits of trying to strategically move money along the way between stocks, bonds and cash. Typically, those moves are based on greed and fear resulting in miserable results. According to Dalbar and Associates 2006 study of investor behavior, mutual fund investors from 1986-2005 only achieved a 3.7% annualized rate of return and day traders actually had compounded losses of over 3%. Why….because we are humans and our emotions drive our decisions (the largest deposits into the U.S. stock market were in the spring of 2000 and the largest withdrawals were in October of 2002). Keep in mind that the U.S. stock market during this same 20 yrs. delivered more than an 11% rate of return. Once again it’s critical that we stay on a course that we know, rather than one filled with speculation and disappointments.
Another assumption that always tickles me is looking at long term spreadsheets that delve into multiple layers of depth trying to accurately forecast our future needs and tax brackets. In nearly 30 yrs. of working with retirees I have never seen anyone spend what they thought they would and I’ve certainly seen a pattern of constant tax law changes. The significance of this point is that you should be in a model that allows you to re-evaluate and make changes along the way in order to adapt to what you will really need vs. some hypothetical projection of what you think you will need (which, at best, might be close for the first 5 yrs).
Therefore, a single product model is absolutely ludicrous. Some single product models would have you put all your retirement assets in a single annuity and make withdrawals that stay under the typical 10% free withdrawal amount. So now you’ve locked yourself into this narrow strategy and suddenly an unplanned emergency or opportunity comes up that requires a significant withdrawal. In addition to a potential large tax hit (non-IRA annuities require all earnings to be withdrawn first and taxes paid) you also could incur a large surrender penalty that could be as much as 10-15% of your excess withdrawal. Single product solutions are rarely in your best interest.
Additionally, who knows how long we will live in retirement. Probability analysis is interesting information and should be taken into consideration, but once again, some models are based solely on probabilities. At some point we all become a statistic that most likely will not match the probability. I had a 30% probability of developing Diabetes, until I got the disease. Suddenly, my probability became 100%. Has my game plan changed…..ABSOLUTELY! So, a structured model based on probabilities alone is inferior to a structured plan based on flexibility.
And finally, a do-it-yourself model is nothing short of retirement roulette. When you were 25 and working with relatively small amounts of money you could make a few mistakes and learn. You had plenty of time and more money to invest. When you’re 60 and making decisions with your life savings, there’s not a lot of time you can afford to spend learning, and certainly no more money if you make a mistake. You only get “one” retirement and you need to get it right. Everyone thought it was so funny in the 90’s when chimpanzees throwing darts at the Wall Street Journal were getting better returns than the analysts. What we didn’t realize at the time was that these reports were making a mockery of advice. “Who needs an advisor, when a monkey is just as good?” What a costly lesson we learned as the market went south.
Whether you’re trying to lose weight…make “athletic” progress or “financial” progress, those who employ coaches do better than those who don’t. Find a financial advisor that can demonstrate expertise in retirement income planning. Your needs are changing as you transition to the land of “distribution”. It may require that you change advisors, just like you would doctors, if your current physician was not able to treat your condition. There will be a plethora of retirement income models to select from, but only a few that will meet your needs.
As a beginning point take a few moments to answer the following questions:
1. In retirement I am more concerned about the reliability of my income than I am the return on my investment.
2. I would rather make periodic adjustments to my investment income in retirement (up and down) based on the returns I actually achieve, than make no adjustments at all and potentially go broke.
3. Having a retirement income strategy that is flexible and liquid enough to adapt to unexpected changes during my retirement years is very important to me.
4. I would prefer not to put all of my retirement savings with one company.
5. I would like to have some guarantees built into my retirement income plan.
6. I understand that having an income that grows with inflation requires that some portion of my portfolio will need to be exposed to market risk.
Believing the 10 “truths” and answering yes to these six questions could result in a segmented approach to retirement income planning. Single product solutions…long term forecasting without sufficient parameters to make adjustments along the way… models that validate themselves primarily on statistical analysis alone… and self serving models that do not lend themselves to an open and diversified product solution shelf may not be in your best interest. Find an advisor who has access to a comprehensive product offering without any incentives to recommend one product over another and who has been trained in retirement income planning. Most of the financial services training programs are focused on helping individuals “accumulate wealth”. Your life savings is at risk.
The “Income for Life Model” is a trademark of Wealth2K, Inc. Copyright Philip G. Lubinski, LLC and Wealth2K, Inc.
All rights reserved 2004
Securities and advisory services are offered through INVEST Financial Corporation, member NASD, SIPC, a Registered Broker Dealer and Registered Investment Advisor.