Today's Seeking Alpha has a quite interesting article from Wells Fargo Asset Management offering tips for building retirement income. The article had me in suspense as it described the drearily familiar problem of the average American who has saved inadequately for retirement, while seeking a way to plug the gap.
With tantalizing lines pardoning the math the authors would need to employ, and then dangling a bottle of "here's where this exercise gets fun and interesting" in front of me, this parched financial journalist was thirsting to see how we get Joe the Plumber from an average pre-retirement savings of $299,000 to the $1,040,000 he needed for a comfortable retirement.
In the end, the authors did get us there (and indeed a little beyond), though the return assumptions seemed generous in today's market framework. What I most appreciated was a bit of creative financing on their part: namely, when the risk seemed too high, they re-framed the portfolio to front-end the risk, which netted a higher ending balance and reduced volatility closer to retirement - exactly the approach taken by target-date funds (and - surprise! - the two authors are TDF fund managers).
All good so far, but I then recalled an article I read about two years ago by Research Affiliates' Rob Arnott and Lillian Wu making the anti-TDF argument that in real-life experience as opposed to theoretical notions about the high risk capacity of the young, 41% of younger workers tend to cash out of some or all of their assets when switching jobs.
Arnott and Wu argued that younger workers are far likelier to lose their jobs and therefore need money to tide themselves over, thus subjecting themselves to the triple whammy of a raid on their retirement funds, a sale of assets when prices are depressed (as layoffs often go hand in hand with recessions), and IRS-imposed tax penalties on withdrawals.
The smart-beta team concluded, contrary to conventional wisdom, that young investors should build up a low-volatility rainy-day fund composed of stocks, bonds and inflation hedges like TIPS. It's an interesting and provocative idea, to be sure. But I'm still worried about how Joe the Plumber achieves the numbers he needs for a comfortable retirement.
What creative retirement financing would you propose? Right now, all I've got is spend less and therefore save more (apropos of which, see my first link below - on inflation). Please add your thoughts in our comments section.
Meanwhile, here are today's advisor-related links:
- Disturbing article from Charles Hugh Smith tracking the very high inflation observed in real-life scenarios vs. low official inflation.
- Using Altman's Z-score bankruptcy measure, firms are no more creditworthy now than they were just before the Great Recession.
- Good news alert! Martin Lowy argues the new floating-NAV MMF rules make the financial system safer!
- The Heisenberg argues disaster awaits the discovery that today's economy is a confidence game.
- Rodney Johnson: Puerto Rico precedent a warning to muni investors.
- Eric Parnell, CFA projects what the next president can expect if today's boom parallels the one preceding the Great Depression.
- Jeffrey Snider: earnings fall by more than $2 over past month; S&P at all-time high.
- James Picerno offers an asset class scorecard through July/(been a great year for REITs).
- Don't Quit Your Day Job explains millennials and today's low home ownership rates.
- American Funds: keep your eye on the long term.