Although the research on safe withdrawal rates has been replicated many times by various researchers to substantiate a safe, sustainable spending level that can withstand at least anything that history has thrown at a retiree, one significant challenge has always lingered: a safe withdrawal rate recommendation is only as good as the time horizon it's associated with. In other words, while the research may support a 4.5% safe withdrawal rate, it's predicated on a 30-year time horizon. If the client planned to retire over a 35- or 40-year time horizon, the safe withdrawal rate would be different. Unfortunately, though, the client may not know that a 35-year time horizon is needed until it's year 31 and there are still a few years left to go! So what's the outlook for a safe withdrawal rate approach if the client outlives the original time horizon?Read More...
As readers of my newsletter know, in May I published research that challenges the safe withdrawal rate as potentially being TOO safe in some environments, where market valuation is not at unfavorable extremes. However, in some feedback I've received from readers, another important point is being made - in some cases, the safe withdrawal rate may also still be too aggressive!
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Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that legislative efforts to prevent the enforcement of the Department of Labor's newly proposed "retirement security rule" have a cloudy future, as both Democrats and President Biden are opposing such efforts. Which suggests that, if enacted, the ultimate fate of the proposed regulation, like its similar predecessors, will likely be decided in the courts.
Also in industry news this week:
- CFP Board has expanded the details it provides regarding disciplinary actions, expanding transparency around the disciplinary process for both CFP professionals and the broader public
- A recent study suggests that advisory firms that hire specialists are able to offer more planning services and increase the amount of time advisors spend with clients, though doing so comes at a cost
From there, we have several articles on retirement planning:
- Why higher interest rates and lower inflation have led to an increased initial safe withdrawal rate for retirees, according to one analysis
- A group of retirement 'supernerds' critiques a recent claim that retirees can confidently use an 8% safe withdrawal rate
- Why retirees might consider gifting while they are alive rather than waiting until their deaths to leave money to loved ones and charities
We also have a number of articles on tax planning:
- How financial advisors can add value for clients by helping them make Qualified Charitable Distributions (QCDs) correctly
- The range of tax-savings opportunities advisors can uncover when reviewing a client's tax return
- A year-end tax planning checklist advisors and clients can use to ensure there will be no surprises when it comes time to file their 2023 tax returns
We wrap up with 3 final articles, all about managing wealth:
- Why having significant wealth does not immunize an individual from worrying about money
- How advisors can support clients who are entering a relationship with unequal wealth
- Budgeting and account management tools consumers (and their advisors) can consider using following the upcoming shutdown of Mint
Enjoy the 'light' reading!
Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that the Department of Labor this week released its long-awaited "retirement security rule", its latest effort to curb conflicts of interest around retirement savings recommendations. Among other measures, the proposal would amend the current 5-part test that determines fiduciary status for retirement accounts by defining as a fiduciary act a one-time recommendation to roll funds from a company retirement plan to an Individual Retirement Account (IRA), strengthen advice standards for independent insurance professionals, apply to insurance products that are not securities, and would cover advice to plan sponsors regarding the menu of investment options to include in a company's retirement plan… though, like the similar 'fiduciary rule' proposed during the Obama administration, this latest regulatory effort is likely to face significant pushback from financial product manufacturers and distributors.
Also in industry news this week:
- A recent study indicates that the RIA model has seen significant growth in the number of firms and advisors during the past decade, and these firms are expected to control 1/3 of industry AUM by 2027
- Despite market headwinds leading to a contraction in advisory firm AUM in 2022, firms continued to produce strong profit margins thanks in part to organic growth
From there, we have several articles on investment planning:
- Why certain private equity investments might not have the diversification benefits that many advisors and clients might expect
- Why the current yield on TIPS could make them an attractive part of a retirement income strategy for clients
- While small caps have experienced higher returns than their larger counterparts during the past century, recent research calls into question whether this factor will persist
We also have a number of articles on advisor marketing:
- How content marketing can help advisors attract clients, even if it means giving away some of their 'secrets'
- Why presenting prospects with proposed planning recommendations ultimately could reduce the chances that they become clients
- How one advisor has used an extra-methodical sales process to convert prospects into clients who will be a good fit for his planning style and philosophy
We wrap up with 3 final articles, all about potential uses of Artificial Intelligence (AI) for advisors:
- Why advisors are more likely to work in tandem with AI tools, rather than as competitors
- How advisors can produce better 'prompts' and get the most out of ChatGPT and other large language models
- Why recommendation engines could be the next big technological advance in investment management
Enjoy the 'light' reading!
Enjoy the current installment of "Weekend Reading For Financial Planners" - this week’s edition kicks off with the news that the CFP Board of Standards launched its 1st ad campaign, dubbed "It’s Gotta Be A CFP", following its transition to a 501(c)(6) organization. In a change from previous campaigns, the first ad directly recommends that consumers seek out a CFP professional for financial advice, and future ads could more directly explain the benefits of earning the CFP marks.
Also in industry news this week:
- Top Democratic Senators are urging the Treasury Department to crack down on a range of estate planning strategies for high-net-worth individuals, including GRATs and IDGTs
- Amid fallout from recent bank failures, both Republicans and Democrats are considering whether current FDIC insurance limits should be increased
From there, we have several articles on retirement planning:
- Why contributions to Roth accounts can sometimes have greater uncertainty than traditional contributions in terms of their after-tax accumulation despite not being affected by future tax rate changes
- How the 'funded ratio' metric can help advisors create effective retirement spending recommendations
- A comparison of a range of variable spending strategies in retirement, from a 'floor-and-ceiling' approach to a 'ratcheting rule'
We also have a number of articles on advisor marketing:
- How to optimize the 5 most important pages on an advisory firm website
- 4 tools advisors can use to improve their website’s search visibility
- How advisors can create and deploy effective keywords to help consumers find their websites when searching online
We wrap up with 3 final articles, all about changes to professional credentials:
- The CFA Institute has unveiled a slate of changes to its certification process, from incorporating practical skills modules to new job-focused pathways in private wealth and private markets
- Why some states are considering reducing the higher education requirements to become a CPA
- CFP Board has announced the members of its new standards commission, which will review and evaluate its competency requirements for Education, Examination, Experience, and CE to earn and maintain the CFP marks
Enjoy the 'light' reading!
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Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that the Federal Trade Commission has proposed a nationwide ban on noncompete clauses in employee contracts, aiming to give employees more freedom to change jobs within the same industry. In the advisor world, where noncompete agreements are fairly common, a ban on the practice could incentivize firms to reassess their employee value proposition and to consider ways to establish their clients’ relationships with the firm, and not just with their advisors.
Also in industry news this week:
- A study suggests that simplification is the top reason consumers combine their investment accounts, signaling that the onboarding process for new advisory client assets is a value-add in itself
- FINRA has released its enforcement priorities for 2023, including a continued focus on compliance with Regulation Best Interest as well as several new priority topics, such as manipulative trading, fixed-income pricing, and trading in fractional shares
From there, we have several articles on retirement planning:
- The latest rules for 2023 Required Minimum Distributions from inherited retirement accounts
- How reviewing and adjusting capital market assumptions can help advisors refine their use of Monte Carlo simulations
- Why relying on Treasury Inflation-Protected Securities (TIPS) to support the bulk of retirement income needs could be risky
We also have a number of articles on investment planning:
- A recent study indicates that rebalancing a portfolio on an annual basis is superior to longer or shorter time horizons
- How stocks and bonds tend to perform following their biggest down years
- The long-term portfolio growth trajectory clients can expect when implementing a dollar-cost averaging strategy
We wrap up with three final articles, all about dealing with distractions:
- The four types of attention and how individuals move between them throughout the day
- How consolidating the wide range of ‘inboxes’, from email to workplace messaging, can help limit distractions throughout the day
- How incorporating breaks to review notifications and social media during the workday can create more time for focused work
Enjoy the ‘light’ reading!
Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that CFP Board is forming a Competency Standards Commission in 2023 to review and evaluate its competency requirements for Education, Examination, Experience, and CE, which represents an opportunity for CFP Board to adjust its requirements, in alignment with the desires of the CFP community itself, to build confidence among the public that those with the CFP marks really will provide them with a consistently high level of financial planning advice!
Also in industry news this week:
- While the FPA is going full steam ahead on its federal and state lobbying efforts to regulate the title “financial planner”, CFP Board is more focused on increasing recognition of the CFP marks
- A recent survey suggests that Americans who use a financial advisor are less stressed than those who do not, but that the perceived price of advice is a deterrent to many (even those with significant assets)
From there, we have several articles on practice management:
- Why it is important for advisors charging on a fee-for-service basis to regularly reassess their pricing, and best practices for letting current clients know about a fee increase
- How advisors can benefit from reviewing their list of clients and letting go those who are no longer good fits for the firm
- How firms can best leverage their internal data to improve the number of client referrals they receive
We also have a number of articles on retirement planning:
- While weak stock and bond market performance has challenged advisors and their clients this year, these trends have likely increased the ‘safe’ withdrawal rate for new retirees
- How the tontine, a centuries-old financial product has made a comeback this year as a way to mediate longevity risk
- A recent survey indicates that Americans broadly feel like they are behind on their retirement saving, with those closest to retirement age most likely to think they need to catch up
We wrap up with three final articles, all about personal growth:
- The lessons entrepreneurs and investors can take from the life and career of Warren Buffett
- How individuals can best harness their willpower to achieve their biggest goals
- While financial advisors regularly give advice to clients, more care is needed when giving unsolicited advice to friends and family
Enjoy the ‘light’ reading!
Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that as enforcement of the SEC’s new marketing rule began on November 4, advisory firms are taking a variety of approaches. While some are looking to gain a first-mover advantage by leveraging client testimonials and third-party endorsements (and adjusting their compliance programs before doing so), others are taking a wait-and-see approach.
Also in industry news this week:
- Why “SECURE 2.0” appears to remain on track to be passed by the end of the year, no matter the final results of the midterm elections
- Amid an “incredibly active” period for cyberattacks, the director of the SEC’s examinations division highlighted the areas of cybersecurity where advisory firms are most often deficient
From there, we have several articles on advisor marketing:
- Three tactics advisors can use to improve their ‘close’ rate with prospective clients
- How a regular firm newsletter can keep clients engaged and improve retention
- The most effective question advisors can use to end initial prospect meetings
We also have a number of articles on retirement planning:
- How the recent increase in interest rates has made TIPS a more viable option to increase a retired client’s safe withdrawal rate
- Why advisors need to take care when analyzing the expected performance of Registered Index-Linked Annuities (RILAs)
- While “free” Medicare Advantage plans might sound enticing, advisors can help their clients assess whether a different plan might actually be more cost-efficient
We wrap up with three final articles, all about personal growth:
- How advisors can harness the power of compounding, not just with investments, but to improve their health and relationships as well
- How advisors can help their clients overcome the cyclical nature of investment knowledge, particularly when FOMO kicks in
- Five mindsets that advisors can use to create success in their professional and personal lives
Enjoy the ‘light’ reading!
Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that amid the current bear market, usage of robo-advisors and other digital advice tools has plummeted, according to a recent study. This suggests that some consumers will be looking to human advisors to better understand their needs and help guide them through the recent market volatility.
Also in industry news this week:
- A survey suggests that a third of their advisors don’t use their firm’s internal technology tools, preferring to use third-party options instead
- The SEC has brought charges against a former broker who sold his practice to an individual who ended up defrauding the seller’s clients
From there, we have several articles on retirement planning:
- Defying popular wisdom, a research study argues that younger workers should delay saving for retirement, even if it means foregoing a company match
- Why the creator of the “4% rule” is sticking with it despite the current bear market and elevated inflation
- A new paper argues that an actual safe withdrawal rate for retirees is significantly less than 4% when taking into account return data from developed countries other than the United States
We also have a number of articles on practice management:
- Five key metrics that underpin advisory firm sustainability
- Why firms should look to leading indicators rather than lagging ones (like AUM) to better understand their growth prospects
- Why it is important for firms to create a formal client feedback system and the most important questions to ask on client surveys
We wrap up with three final articles, all about the meaning of money:
- How the dramatic changes in the American economy, markets, and personal balance sheets during the past few years have shown the challenges of achieving sustained, widespread prosperity
- Why now could be a great time to spend and get enjoyment out of one’s money, despite recent market volatility
- A survey shows how individuals in 17 advanced economies rank what brings them the most meaning in their lives
Enjoy the ‘light’ reading!
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For nearly 30 years, the so-called ‘4% rule’ has been a starting point for retirement planning conversations between financial planners and their clients. But as equity valuations such as the Shiller CAPE ratio have ratcheted up to nearly all-time highs in recent years, with bond yields simultaneously reaching all-time lows (suggesting below-average future returns in both asset classes), some experts have questioned whether a 4% initial withdrawal rate will continue to be ‘safe’ in the future. A new white paper by Morningstar feeds into this speculation, with its much-publicized conclusion stating that, given today’s market conditions, the future safe withdrawal rate should be lowered to 3.3%.
The Morningstar paper’s key insight is that expectations for future safe withdrawal rates should be adjusted based on current market conditions (which other research has supported). Accordingly, the paper’s authors use forward-looking return projections to calculate their future safe withdrawal rate estimates. But the investment return assumptions that Morningstar used for its analysis were so low – with real returns averaging just 5.7% for equities and 0.5% (!) for fixed income over 30 years – that, if those projections were to come to pass, the next 30 years would be among the very worst market environments in U.S. history.
While such conservative return estimates might make sense over a 10- to 20-year time horizon (since research has shown that CAPE ratios are strongly predictive of returns over that time range), extending those assumptions out to 30 years is arguably unrealistic. This is because there is no precedent – even in other eras with high equity valuations – for 30-year returns that low (other than the period spanning the late 19th and early 20th centuries, when financial panics and global war created a far more tumultuous and unpredictable environment than the comparatively stable world today). In reality, markets tend to revert to the mean, meaning that even the periods with the worst safe withdrawal rates in history contained intervals of offsetting below- and above-average returns, causing each to end out with near-average returns over the full 30-year horizon.
In this way, Morningstar’s choice to focus on (historically low) 30-year returns for its analysis disregards the evidence of what really drives safe withdrawal rates, which is the sequence of returns. Because the periods that have tested the 4% rule in the past were not necessarily those with the worst 30-year returns, but those whose returns in the first 10-15 years were so bad that retirees needed to withdraw too much of their portfolio to be able to recover once conditions improved. So in reality, Morningstar’s results may have been more realistic if they had only forecast 15-year instead of 30-year returns, since the 15-year period is both easier to predict on current market data and more predictive of safe withdrawal rates.
Ultimately, however, Morningstar’s conservative return assumptions – which are comparable to some of the worst periods in the past 140 years – actually serve to highlight the strength of the 4% rule, which was created to withstand just those types of worst-case scenarios. Which means that, even if their historically low projections do come to pass, resulting in returns equal to the worst return scenarios in history, a 4% initial withdrawal rate would still hold up. And while today’s market conditions do merit caution (as there is reason to believe that the next 15 years could experience below-average portfolio returns), in reality, such conditions were precisely what the 4% rule was created for, to begin with!