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
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Supposebly New book. Shipped damaged to me.
Just received the book 6 minutes ago. Outside of box was in great condition. Opened it up and found my brand new book damaged as shown in the pictures. Still usable as a book but not worth the $48 I paid for a new book.
