Letters to the Editor

Rob Bennett of PassionSaving.com sent out a press release last Sunday through PRWeb.com. He mentions this site. It is entitled "Retirement Planning Tools Offer Dangerous Advice."

Retirement Planning Tools Offer Dangerous Advice

Here are letters resulting from the press release. NOTE: email addresses are available at the sites.

Practical application of SWR BEFORE one reaches retirement

There is great value in the current and ongoing research into Safe Withdrawal Rates (SWR). The value lies in identifying the issues within the many factors that have effect on what the rate should be. One of those issues is volatility of returns. Therefore, risk reduction is an important element of establishing a SWR. Risk reduction is achieved through proper application of asset allocation principles. However, all the research and its' applications have focused on the investment component of the question of SWR.

There is enough current knowledge about the subject to extend the usefulness of the research further - that is to separate the retirement planning issue from the investment implementation issue. The key retirement planning question is to be able to answer these two fundamental questions:

1) How much do I need to retire? Moreover, 2) When can I retire?

Reverse engineering SWR research leads to this conclusion: if one is intending on applying SWR to their portfolio - then wouldn't it be prudent to use that intention in the planning phase to begin with. In other words, why switch planning methods? In other words, why use deterministic or linear online retirement calculators to determine how much you need to retire, and then switch the retirement management to SWR methods?

My approach has been to use the SWR as the baseline planning factor. I call this the "Wealth Rule" in "Wealth Odyssey." Simply stated, whatever withdrawal rate one uses, the amount required is automatically determined from simple algebra from that. Here's the formula: SOIL = (WR%) times Assets Required. The benchmark becomes SOIL - Standard of Individual Living; because the starting assumption is that a person wants to retire at the same standard of living they currently have. SOIL is adjusted accordingly for any desire above or below their current living standards. Therefore, SOIL divided by (WR%) (or using terms from your website substitute SWR for WR%) = Assets Required. Now the "Progress Line" can be determined as to how much have they saved compared to how much they require. This also is informative as to how much more they need to save each year to reach the required mark. Now, people can be better informed whether their expectations can be met, and how to modify those expectations in order to retire.

In addition, it is apparent that the longer one wishes their portfolio to last, in other words the sooner they plan to retire, the lower the SWR should be. This too should be used in the planning phase to have a realistic idea of when retirement may be possible. If retirement needs to be pushed out to later years, then a higher SWR may be possible, thus reducing the Assets Required. Mathematically with simple math, a planner can show how saving more and saving longer, makes retirement possible.

Retirement Planning in the past has been investment centered with investment rates of returns being the main focus. People would be better served by focusing on the real issues and plugging in what their real value is during each review point, rather than projecting something hopeful and not achieving those results (why many change planners - go to a new one that promises better).

My book, "Wealth Odyssey" and its' supporting website www.WealthOdyssey.com , discuss these concepts. In addition, the opus shows how to bind all their financial issues into a road map that shows them how everything relates together along with this important issue of Retirement Planning.

Yours is a great website and I will include a link to it on the "Wealth Odyssey" website. Please consider including the opus in the books you reference as well. It is available everywhere through order.

In summary, the benchmark is their SOIL which serves as the all important reference point. The practical application of the SWR concept occurs BEFORE a person retires in that it can be used to help them plan and save effectively for retirement, preferably long before they reach it. There is no need to switch the terms which describe the plan between accumulation and withdrawal phases; for Retirement Planning, the terms remain the same. This simple application also answers the two fundamental questions people have: 1) How much do I need to retire? And, 2) When can I retire?

Retirement Planning (the architectural blueprints) can finally be separated from Investment Implementation (building to blueprint specifications) strategies.

Larry R. Frank, Sr., MBA, CFP(r), Wealth Mentor and Author

I have posted a brief review in the Books Section.
Wealth Odyssey

Beyond investment strategy

I have just discovered your web site this morning, thanks to a link on a web news service. I am very pleased with it, and highly commend your sensible, conservative approach to investing during the distribution phase.

Like you, I have been pondering these matters for a long time (for about 15 years, in my case), and I would like to suggest that, as time goes by, you might even further broaden your approach.

Ultimately, a person's or family's financial solvency during retirement is not primarily an investment management problem. It is fundamentally a cash flow management problem. One's investment portfolio is an important element of cash flow, but it is not the only element, and not the most important one (expense management is actually the most important, and it is much more under the retiree's control).

Articles and models that focus primarily on investment tend to oversimplify the situation. The amount that should be withdrawn annually from one's savings is not a fixed amount, nor a smoothly inflating amount. Rather, it is the amount that one needs to live on after one has collected one's other income and paid one's expenses. This amount, being the difference between two relatively large numbers, each of which can fluctuate, itself becomes a number that not only can fluctuate, but can change dramatically from year to year.

An example: most homeowners these days (unlike the old days) retire with a mortgage still to be paid. The need to withdraw cash from savings will drop dramatically after the mortgage is paid off. A model that treats the "withdrawal" rate as some kind of permanently smooth line, therefore, is so divorced from reality as to be useless. This is just one example out of several dozen I could give you.

My own answer to this: what we need is a cash flow model that embraces all the elements of a retiree's finances. Only then can we illustrate what the retiree might need in terms of withdrawals on savings from year to year. And only then can a suitable investment strategy be devised.

Of course, this is a very difficult sort of model to build -- I know, because I have been working on one for several years. If anything, my own model goes too far in the opposite direction: making fairly simplistic (and fairly conservative) assumptions about investment return, leaving it to people like yourself to help people figure out how to achieve the appropriate returns.

Perhaps what the world really needs is a combination of what you are doing and what I am doing (or rather, I should say "we," since I have formed a small company, which you can find out more about at www.StillRiverRetire.com ).

In any event, I am pleased to know about your website and about your research, and I hope that, being on the side of the angels, you have great success in your work and in getting your message out.

Chuck Yanikoski

Earlier Letters to the Editor

Unclemick about the Dow Jones Utilities. BillW (with Thanks!) about getting started. Rob Bennett about Dividend Theory versus Dividend Reality. This led to a breakthrough.
January 11, 2006 Letters to the Editor


Comments Inspired by Reading "The Story Behind the Numbers" by Rob Bennett. My response, including Risky Alternatives, Dollar Cost Averaging Today and DCA Today: The Point of Frustration.
January 29, 2006 Letters to the Editor


More Comments: This Time Inspired by "Dollar-Cost Averaging Today" and Comments Inspired by "Year 10 Choices."
February 5, 2006 Letters to the Editor