Outliving
Your Savings
Let's
say you have $1,000,000 invested (60% S&P 500 Index / 40%
Lehman Brothers Government Bond Index). You retire and want to
withdraw an inflation-adjusted 5% annually for living expenses.
You're
set, right? After all, stocks return 10% a year, and Government
Bonds nearly 6%....
The
graph below shows a Monte Carlo simulation of 1,000 such retirements:

Uh-oh!
Fully 12% of these possible futures lead to your running out of
money before you die -- like those on the unlucky red path that
literally falls off the bottom of the chart. In some instances,
this happens in as little as 13 years.
Was
this the kind of gamble you were planning to take with your retirement?
From
Nest Egg to Goose Egg
Early
retirement is by far the most dangerous time for retirees. A big
loss here creates insuperable obstacles for your savings to overcome.
This
chart shows the results of 1,000 random diversified retirement
portfolios and the chance that they would run out of money within
25 years. Note that if your nest egg is down 10% from its original
value a few years into retirement, your odds of going broke skyrocket.

Strategies
While
our books provide an excellent guide
for the ordinary retail investor, our high net worth clients can
do better.
Better
Diversification: Virtually every portfolio that comes
across our desk is woefully underdiversified, exposing its owner
to needless, uncompensated risk. At Conservative Wealth Management,
we divide retirees' assets into two broad strategies with low
correlations between them: investing a portion for capital
appreciation, and a portion for income. This allows
us to pull more of your current living expenses from whichever
side is doing better that year.
A
Better Capital Appreciation Strategy: Here we use our
proprietary DFA asset allocation model to access global equities
with a value and small-cap tilt, balanced by short- to intermediate-term
global bonds. These portfolios have superior expected risk-reward
characteristics to those outlined in our books, so your money
works harder for you, even after expenses.
A
Better Withdrawal Strategy: Look what a difference it
makes whether you take the money from the best performing asset
class each year (Sell High) versus withdrawing the money evenly
from each asset (Sell Evenly).
The
chart below covers 1,000 Monte Carlo scenarios with $1000 invested
into four asset classes:

When
income is needed, we break off a piece of whatever appears to
be the most overpriced assets in the growth portfolio and sell
it. A strategy this simple could vastly prolong the life of your
nest egg, leaving more money for your children or for your estate.
A
Better Income Strategy: We select individual high dividend
stocks, real estate investment trusts (REITs), as well as treasury
inflation-indexed bonds (TIPS), as well as domestic and international
bonds of varying credit quality and maturity that take advantage
of the yield and credit curves. We also will use leveraged closed-end
municipal bond funds (CEFs), emerging market bonds, high yield
bonds, Master Limited Partnerships (MLPs), Royalty Trusts, and
covered call income strategies for a small percentage of client
portfolios, at times when the risk/reward tradeoffs make these
worthwhile.