Clearview’s Sustainable Wealth Track Can Help Provide An Answer

A Sustainable Wealth Track is a thoughtfully designed path into and through the years of retirement.  It lays out the appropriate withdrawal rate and asset allocation policy and does so within a manageable risk tolerance framework.   Having studied the academic literature on this topic over several years, we have arrived at what we believe to be a safer, more client centered policy framework.  Retirement spending guidelines should be practical, sustainable and sensitive to a client’s willingness to bear riskFlexibility and thoughtful planning, especially tax planning, are very important in determining the appropriate solution.   While many advisors simply default to a level of 4 to 5% annual withdrawal rate in discussion with their clients, we believe that a successful solution involves a series of planning steps.

The process of determining the appropriate withdrawal rate is complicated. There is a great deal of research on spending guidelines based upon capital market expectations combined with the market’s historical returns.  More recently, Monte Carlo modeling (simulations based upon historical returns) has become popular as a way of arriving at an optimal withdrawal rate and asset allocation.  However, historical returns may not be a good forecasting method.  Further, it is impractical in our view to use a “black box” manipulation of historical returns as a way of arriving at a specific client’s future rate of withdrawal.   

The Five Steps to Achieve a Safer, More Sustainable Retirement:

Educating Both Client and Family on the essential decisions and variables is a first step.  There is no one-size-fits-all safe withdrawal rate or asset allocation that can work for everyone.  Risk tolerances and the client’s past experiences with investing are important considerations.   We gain insight into the family’s objectives for the portfolio corpus and the potential needs of future generations through this discussion while creating understanding and managing expectations.  

Acquiring Sufficient Wealth to support retirement is of paramount importance.    We develop a plan defining the optimal amount of wealth that should be set aside during working years in support of a positive post retirement experience.   Clients must realize that spending is done in after-tax dollars so we must plan for and then manage assets in a tax-aware way to maximize funds available.

Developing and Maintaining a Logical and Dependable Spending Plan Designing a plan and staying with it can have a huge impact on long term success.  Periodic reviews can help to keep track of market returns/spending results, and any one-time family expenditure needs.  Unanticipated contingencies such as inflation, economic cycles, market dips or family emergencies must be factored in.

Recognizing that Portfolio Results are Market Path Dependent is an important consideration.  After a prolonged stock bear market, when stock prices/earnings ratios are low, slightly higher withdrawal rates may be employed effectively just as after a prolonged bull market, when price/earnings ratios are high, it may be necessary to use a lower withdrawal rate.  Likewise, when bond income generation rates are low, as they are now, we must factor into the solution a greater reliance on stock returns.  The allocation to stocks, however, must remain commensurate with a client’s risk tolerance regardless of rates.

Retaining Flexibility in Retirement Spending Near term spending increases (above inflation) may occur or reductions may become necessary as a result of market conditions.  Through ongoing reviews we can help our families to react to earnings shortfalls (a decline in corpus) early and thus limit any damage.  Inflation, the change in moneys purchasing power, is also carefully monitored as it may also become an important planning issue. A long term focus is appropriate and it allows for a more consistent stock allocation over time. 

At Clearview, we believe that a successful solution (an appropriate withdrawal rate and asset allocation) involves dedicated planning and a unique client-based design.  To sustain a retiree’s, or post-divorce family’s, wealth over an extended time frame requires both investment and spending discipline.   We believe that following these five steps can significantly improve the chances of success.   By establishing practical retirement spending guidelines, remaining flexible to market dynamics and sensitive to our client’s willingness to bear risk, we can support a better solution for the long term.  Thoughtful planning, especially tax planning, can also add significant value.