We use what I call a napkin approach with clients, where we take their portfolio value at various withdrawal rates while maintaining an equity allocation of around 60-70 per cent of their portfolio, even in retirement. The fixed income side of the portfolio, despite being lower than some more traditional models might use for a retired client, can function as a means of maintaining those withdrawals through any downturn on the equity side. It functions as protection against the downside, an income stream, and a means of assuaging client anxiety.
Not that the equity side should actually provoke any anxiety, even among retired clients. I’ll often position that allocation not just in terms of the per centage in their portfolio but in the absolute number of companies they hold. Even that first client, I reminded him that he owns 13,000 companies, each selected for its resilience, its quality, and its historical ability to recover from tough moments. The fixed income side, I remind them, can offset a potential downturn and cover withdrawals through a market recovery, but it’s the equity side that will protect against the risk of outliving their savings.
The fixed income side allows us to maintain that core of equities in retirees’ allocations and that, in turn, helps them live better in retirement. Looking historically we find that for every 10 per cent more in equities a client holds, they get a roughly 75 basis point bump in overall returns. On a $2 million retirement portfolio, that amounts to an extra $15,000 per year on their portfolio for the rest of their lives.
We believe that in retirement clients should not get more conservative. They’re not earning any more money, so they need their portfolio to last as long as they live. Especially with longer life expectancies these days and the higher rate of inflation, clients need to outpace the cost of living for a long time. Equities can do that. We’ve seen clients move even into 80/20 portfolio splits because they know not to panic and they know what their fixed income side can do to protect them should the equities turn.
A downturn, too, doesn’t always mean that a client keeps making the same financial decisions. I’d say about 80 per cent of my clientele would automatically adjust their spending during a market downturn. They might delay a new car purchase or a big trip until things recover, taking some pressure off their portfolios. The other 20 per cent might end up having a conversation about their choices now. We’ll talk about what is happening, what could happen, and how giving the market time to recover can set them up well in the long-term. It’s worthwhile to note in these conversations that over the past two to three decades we’ve only seen one bear market drag for an extended time, and that was in the context of a near-collapse of the US financial system.
