What If We Had Followed Our Advisers' Recommendations? - A Look Five Years Later

by: Bob Wells

Summary

Retirement often calls for a fresh investing strategy.

A number of strategies were recommended by advisers at the time of our retirement.

It has been five years since those strategies were first presented.

Let's look at how each performed during the period.

How many times have we all thought back and wondered what would have happened if we had just taken that different course? I had just that question in mind last year when I re-considered the investment advice my wife and I received at the time of our retirement and wrote this article. It's now a year later and time to again ask the question: Would I have done better if I had followed our advisor's advice?

I was a government employee for more than 20 years and a participant in our 401(k) program. I knew nothing about investing back then and simply decided to put 100% of my dollars in an S&P 500 Index Fund. It wasn't until 19 years later when I was about a year away from retirement that I started to really pay attention to my account. Prior to that time the idea of bear markets seemed unimportant. A year away from retirement, things started to look quite a bit different.

We had planned a retirement at age 62 in August of 2008. In the latter part of 2007 I had made the decision to move all of our funds from the S&P 500 Index to a cash fund paying what was then a solid 3.5%. Clearly later this proved to be a great decision.

We retired on schedule. During early retirement I worked regularly as a contract trainer. We made the decision at first to simply withdraw 3.5%, the amount paid at the time by the cash fund to supplement our income. By 2010, we saw a dramatic decrease in the rate being paid by that fund and realized we needed advice.

My advisor suggested a number of approaches: A move to an income fund designed for retirees, a more "aggressive option" and finally the option of an annuity.

My wife's advisor started with an interesting exercise where it was determined we could withdraw 4% a year from our account plus inflation with a 70% chance of not running out of money. This was based on a recommended mix of around 60% bonds and 40% stocks. When we showed concern about the numbers, he mentioned 50% bonds and 50% stocks would increase the odds and again spoke at great length about the option of an annuity.

Even though both advisors genuinely wanted to assist with our decision, none of the approaches presented struck a chord with either of us. With the assistance of our best friends we ventured into the uncharted territory of self-directed investing.

My buddy was a believer in dividend investing so we decided on that path starting in February 2011. I started like my friend with a focus on high yield and began to panic a bit as summer approached. I began to reduce the number of high yield stocks and purchased more familiar dividend growth names.

I decided to look for those dividend stocks yielding 3% or more that had done better than the market during the 2002 and 2008 bear markets. By the end of the year I had discovered that most of the stocks I now held were dividend growth stocks.

I thought it would be interesting to take a look at what might have been and to see where we might be today if we had followed the advice that at the time "just didn't seem right." Each of the recommended approaches were directly driven by the traditional concept of capital gain and 4% annual withdraw plus 3% inflation.

Let's assume for a moment we started on January 1st of 2011 with a portfolio of $250,000. We withdrew 4% each year, adjusted for inflation by 3% at the start of each year. In year one we withdrew $10,000 at the start of the year. In year two, we withdrew $10,300, in year three, $10,609, in year four we withdrew $10,927 and finally $11,255 was withdrawn in year five.

In Scenario 1, we were presented with the most conservative of two target-date funds -- the first designed specifically for retirees. It is focused on capital preservation. It is currently invested: 74% Treasuries, 6% aggregate bond fund, 12% S&P 500 Index, 3% small cap index and 5% internationals.

In Scenario 2, we were presented with the second fund -- 2020 -- targeted for those a few years away from retirement. It was recommended for those retirees willing to assume just a little more risk. It is current invested in 44% Treasuries, 5% aggregate bond funds, 27% S&P 500 Index, 8% small-cap index and 15% international. It was professionally managed based on the chief tenets of modern portfolio theory.

In Scenario 3, we used the model recommended by my wife's advisor a simple mix of 50% bonds -- the aggregate bond fund; and 50% stocks -- the S&P 500 Index.

CAPITAL PRESERVATION FUND

Let's start with Scenario 1, the most "conservative" of the options suggested. In year one the fund delivered a gain of 2.23%, clearly under the 4% ($10,000) provided for income. So at the start of 2012, we have $245,352 in capital. $10,300 is subtracted for income. leaving capital of $235,052. During 2012, the fund delivered a gain of 4.77%. We started 2013 with capital totaling $246,264. We subtract $10,600 for income, leaving a balance of $235,655. In 2013, the fund returned 6.97%; we end 2013 with a portfolio valued at $252,080. In 2014, the fund had a total return of 3.77%.

In 2015, the fund achieved a total return of 1.85%. In Scenario 1, we would have paid the bills and we would have ended up five years later with the portfolio roughly 3% lower than at the start.

Year

Starting

Balance

Income

Remaining

Balance

Total

Return

Ending

Balance

2011

$250,000

$10,000

$240,000

2.23%

$245,352

2012

$245,352

$10,300

$235,052

4.77%

$246,264

2013

$246,264

$10,609

$235,655

6.97%

$252,080

2014

$252,080

$10,927

$241,153

3.77%

$250,244

2015

$250,244.

$11,255

$238,989

1.85%

$242,574

TARGET FUND

Let's move next to Scenario 2 -- The 2020 Target Fund. Again we start with $250,000, deducting $10,000 for income at the start of 2011, leaving $240,000. The fund returned .41%, for the year, leaving a slightly reduced portfolio with which to begin 2012. Again income is deducted, leaving $230,684. The fund grew by 10.42% for the year. This time $10,300 is deducted for income to adjust for inflation. The portfolio ended the year at $254,721. We start 2013 by deducting $10,600 for income, leaving a balance of $244,121. 2013 saw the fund return 16.03%. We started 2014 with a portfolio valued at $282,253.

In 2015, the fund achieved a total return of 1.35%. The portfolio balance at the end of the year was $279,366.

Year

Starting

Balance

Income

Remaining

Balance

Total

Return

Ending

Balance

2011

$250,000

$10,000

$240,000

.41%

$240,984

2012

$240,984

$10,300

$230,684

10.42%

$254,721

2013

$254,721

$10,609

$244,112

16.03%

$282,253

2014

$282,253

$10,927

$271,326

5.74%

$286,900

2015

$286,253

$11,255

$275,645

1.35%

$279,366

50% STOCKS/50% BONDS

Scenario 3 -- 50%/50% -- stocks/aggregate bond fund. Again we start with $250,000, deducting $10,000 for income at the start of 2011. This again leaves $240,000. The 50/50 fund has a total return of 5%. We begin 2012 with a portfolio totaling $252,000. We deducted $10,300 for yearly income, leaving a balance of $241,700.

For 2012 50/50 had a total return of 10.18%. We started 2013 with a portfolio valued at $266,305. We deducted $10,609 for income leaving $255,696. 2013 produced a negative return in the bond fund equal to (1.68%). Total return for 50/50 was 15.38%. We began 2014 with a portfolio valued at $295,022, 18% higher than when we started after withdraws for income.

In 2015, the fund achieved a total return of 0.86% for the year.

Year

Starting

Balance

Income

Remaining

Balance

Total Return

Ending

Balance

2011

$250,000

$10,000

$240,000

5.0%

$252,000

2012

$252,000

$10,300

$241,700

10.18%

$266,305

2013

$266,305

$10,609

$255,696

15.38%

$295,022

2014

$295,022

$10,927

$284,095

10.255%

$313,229

2015

$313,229

$11,255

$301,974

0.86%

$304,556

50% STOCKS/50% TREASURIES

Scenario 4 - 50%/50% Treasuries were added for consideration because it was used as the basis for early research on the 4% withdraw rule. Implied in the research was the notion that investors following this mix would likely not run out of money in a 30-year retirement.

Year

Starting

Balance

Income

Remaining

Balance

Total Return

Ending

Balance

2011

$250,000

$10,000

$240,000

2.28%

$245,472

2012

$245,472

$10,300

$235,172

8.77%

$255,797

2013

$255,797

$10,609

$245,187

17.17%

$287,286

2014

$287,286

$10,927

$276,359

8.045%

$298,592

2015

$298,592

$11,255

$287,337

1.75%

$292,365

It would appear that of the four approaches recommended by our advisors that the mix of 50% stocks and 50% bonds invested in the aggregate bond fund would have proven the better choice for the five year period in question.

DIVIDEND GROWTH PORTFOLIO

In our final scenario, we look at an account that started one month later than our first four examples. This account began in February of 2011 with $249,000. It is a diversified dividend growth portfolio with an overall beta around .70 made up almost exclusively from dividend champions, contenders and challengers.

In the first 11 months this portfolio collected $12,624 in dividends. $11,000 was taken as income during the course of the year with $1,000 per month being deposited into the owners' bank account the first of each month. The portfolio finished its first year valued at $264,523.

During 2012, the portfolio collected $13,417 in dividends and $1,100 per month was deposited the first day of each month. For the year $13,200 in dividend income was withdrawn. The portfolio ended 2012 valued at $308,777.

During 2013, $1,100 was withdrawn during the first three months only. During the remaining 9 months, dividends received were re-invested back into the account. Dividends totaling $16,060 were received during the year. The account ended 2013 valued at $365,525.

To make this a fair comparison with the other examples I deducted $3,400 in additional dividends paid out in income for the above examples which would have left an end of the year balance of $361,125.

During 2014, I made the decision once again not to withdraw the dividend income I received for income but instead to re-invest the dividend amounts received. In 2014, $17,669 in dividend income was received.

I elected again to re-invest rather than spend dividend income received during 2015.

Again I elected again to re-invest rather than spend dividend income received during 2015.

Year

Starting

Balance

Income

Remaining

Balance

Total Return

Ending

Balance

2011

$249,000

$11,000

$248,000

6.25%

$264,523

2012

$264,523

$13,000

$251,523

16.52%

$308,777

2013

$308,777

$16,060

$305,477

18.49%

$365,777

2014

$365,777

$17,669

14.35%

$417,996

2015

$417,996

$17,746

(2.73%)

$406,298

The portfolio began 2016 valued at $406,298.

Again to make it a fair comparison, let's look at the chart again. This time we show income deducted at the same rate as the other four examples for both 2014 and 2015.

Year

Starting

Balance

Income

Remaining

Balance

Total Return

Ending

Balance

2011

$249,000

$11,000

$248,000

6.25%

$264,523

2012

$264,523

$13,000

$251,523

16.52%

$308,777

2013

$308,777

$16,060

$305,477

18.49%

$365,777

2014

$365,777

$10,927

$354,850

14.35%

$405,770

2015

$405,770

$11,255

$394,515

(2.73%)

$383,744

As you may have guessed by now, the dividend growth portfolio just described is mine. Here's a link to my complete portfolio at the end of the last quarter.

My portfolio is subject to a portfolio business plan that helps direct my buy and sell decisions. Here's a link to that plan.

Ultimately, investing comes down to the choices we make. Looking at those we were presented at retirement I feel we made a great choice. I'm confident moving forward with our dividend growth portfolio that we can meet our income objectives no matter the storms ahead.

Now it's your turn. I have two questions for each of you this time around in an effort to start what I trust will prove a meaningful discussion:

  • What did your advisor recommend for your distribution-stage portfolio?
  • How do you expect to handle withdrawals from principal required when required minimum distributions begin?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.