Building and Managing a Diversified Retirement Portfolio

Transcription

1 Building and Managing a Diversified Retirement Portfolio AAII Sarasota Craig L. Israelsen, Ph.D. 7Twelve Portfolio February 18,

2 Key Concepts Retirement Account Multiple (or RAM)

3 Key Concepts Retirement Account Multiple (or RAM) Initial Withdrawal Rate

4 Key Concepts Retirement Account Multiple (or RAM) Initial Withdrawal Rate % of Income Replaced

5 The Mathematics of Income Replacement RAM * % Withdrawal Rate = % Income Replacement $100,000 final salary $1.2 million retirement account RAM = 12x

6 The Mathematics of Income Replacement RAM * % Withdrawal Rate = % Income Replacement $100,000 final salary 4% of account balance $1.2 million retirement account RAM = 12x

7 The Mathematics of Income Replacement RAM * % Withdrawal Rate = % Income Replacement $100,000 final salary 4% of account balance 48% income replacement $1.2 million retirement account RAM = 12x

8 The Mathematics of Income Replacement RAM * % Withdrawal Rate = % Income Replacement 12 * 4% = 48% income replacement

9 Various RAM and Withdrawal Rates Retirement Account Multiple of Pre- Retirement Income (RAM) Multiplied By Initial Withdrawal Rate (%) Equals % of Pre-Retirement Income Being Replaced in First Year of Retirement 7x * 3% = 21%

10 Various RAM and Withdrawal Rates Retirement Account Multiple of Pre- Retirement Income (RAM) Multiplied By Initial Withdrawal Rate (%) Equals % of Pre-Retirement Income Being Replaced in First Year of Retirement 7x * 3% = 21% 10x * 4% = 40%

11 Various RAM and Withdrawal Rates Retirement Account Multiple of Pre- Retirement Income (RAM) Multiplied By Initial Withdrawal Rate (%) Equals % of Pre-Retirement Income Being Replaced in First Year of Retirement 7x * 3% = 21% 10x * 4% = 40% 12x * 4% = 48%

12 Various RAM and Withdrawal Rates Retirement Account Multiple of Pre- Retirement Income (RAM) Multiplied By Initial Withdrawal Rate (%) Equals % of Pre-Retirement Income Being Replaced in First Year of Retirement 7x * 3% = 21% 10x * 4% = 40% 12x * 4% = 48% 15x * 5% = 75%

13 Example of 12x RAM Pre-Retirement Annual Final Salary Retirement Account Multiple (RAM) (representing 12x final salary) 4% Initial Withdrawal Rate % Income Replacement $40,000 $480,000 $19,200 48%

14 Example of 12x RAM Pre-Retirement Annual Final Salary Retirement Account Multiple (RAM) (representing 12x final salary) 4% Initial Withdrawal Rate % Income Replacement $40,000 $480,000 $19,200 48% $60,000 $720,000 $28,800 48%

15 Example of 12x RAM Pre-Retirement Annual Final Salary Retirement Account Multiple (RAM) (representing 12x final salary) 4% Initial Withdrawal Rate % Income Replacement $40,000 $480,000 $19,200 48% $60,000 $720,000 $28,800 48% $80,000 $960,000 $38,400 48% $100,000 $1,200,000 $48,000 48% $120,000 $1,440,000 $57,600 48%

16 % Income Replacement in Retirement Retirement Account Multiple of Final Salary (RAM) Various Combinations of RAM and Withdrawal Rate Initial Withdrawal Rate (%) in Retirement 2% 3% 4% 5% 6% 7% 5x 10% 15% 20% 25% 30% 35% 7x 14% 21% 28% 35% 48% Income 42% 49% Replacement 10x 20% 30% 40% 50% 60% 70% 12x 24% 36% 48% 60% 72% 84% 15x 30% 45% 60% 75% 90% 105% 20x 40% 60% 80% 100% 120% 140% 25x 50% 75% 100% 125% 150% 175%

17 % Income Replacement in Retirement Retirement Account Multiple of Final Salary (RAM) Various Combinations of RAM and Withdrawal Rate Initial Withdrawal Rate (%) in Retirement 2% 3% 4% 5% 6% 7% 5x 10% 15% 20% 25% 30% 35% 7x 14% 21% 28% 35% 42% 49% 10x 20% 30% 40% 50% 60% 70% 12x 24% 36% 48% 60% 72% 84% 15x 30% 45% 60% 75% 90% 105% 20x 40% 60% 80% 100% 120% 140% 25x 50% 75% 100% 125% 150% 175% Higher RAM and/or Higher Withdrawal Rate Produce Higher Income Replacement

18 Conservative Retirement Model 90 Year Review: Annual Cost of Living Adjustment (COLA) 25% Stock/75% Fixed Income Portfolio 15% Large Stock, 10% Small Stock, 55% Bonds, 20% Cash Initial Withdrawal Rate (%) 2% 3% 4% 5% 6% 7% Historical Success Rate of Portfolio Lasting 35 Years 0% 100% 100% 100% 100% 93% Success 93% 64% 1% 100% 100% 100% 96% Rate 71% of 36% Lasting 35 2% 100% 100% 100% 82% Years 46% 25% 3% 100% 100% 93% 59% 34% 21% 4% 100% 100% 71% 37% 21% 14% 5% 100% 93% 46% 27% 14% 2%

19 Conservative Retirement Model 90 Year Review: Annual Cost of Living Adjustment (COLA) 25% Stock/75% Fixed Income Portfolio 15% Large Stock, 10% Small Stock, 55% Bonds, 20% Cash Initial Withdrawal Rate (%) 2% 3% 4% 5% 6% 7% Historical Success Rate of Portfolio Lasting 35 Years 0% 100% 100% 100% 100% 93% 64% 1% 100% 100% 100% 96% 71% 36% 2% 100% 100% 100% 82% 46% 25% 3% 100% 100% 93% 59% 34% 21% 4% 100% 100% 71% 37% 21% 14% 5% 100% 93% 46% 27% 14% 2%

20 Annual Cost of Living Adjustment (COLA) Moderate Retirement Model 90 Year Review: % Stock/35% Fixed Income Portfolio 40% Large Stock, 25% Small Stock, 25% Bonds, 10% Cash Initial Withdrawal Rate (%) 2% 3% 4% 5% 6% 7% Historical Success Rate of Portfolio Lasting 35 Years 98% Success Rate of Lasting 35 Years 0% 100% 100% 100% 98% 95% 91% 1% 100% 100% 100% 98% 95% 89% 2% 100% 100% 100% 95% 89% 86% 3% 100% 100% 98% 91% 87% 71% 4% 100% 100% 96% 89% 80% 55% 5% 100% 98% 91% 87% 64% 30%

21 Moderate Retirement Model 90 Year Review: % Stock/35% Fixed Income Portfolio 40% Large Stock, 25% Small Stock, 25% Bonds, 10% Cash Annual Cost of Living Adjustment (COLA) Initial Withdrawal Rate (%) 2% 3% 4% 5% 6% 7% Historical Success Rate of Portfolio Lasting 35 Years 0% 100% 100% 100% 98% 95% 91% 1% 100% 100% 100% 98% 95% 89% 2% 100% 100% 100% 95% 89% 86% 3% 100% 100% 98% 91% 87% 71% 4% 100% 100% 96% 89% 80% 55% 5% 100% 98% 91% 87% 64% 30%

22 Retirement Income Replacement, Portfolio Withdrawal Rate, and Historical Success Rate (3% COLA assumed) % Income Replacement in Retirement Based on RAM (RAM = Retirement Account Multiple) (Green shading indicates 60% or higher income replacement) 5x RAM 10% 15% 20% 25% 30% 35% 7x RAM 14% 21% 28% 35% 42% 49% 10x RAM 20% 30% 40% 50% 60% 70% 12x RAM 24% 36% 48% 60% 72% 84% 15x RAM 30% 45% 60% 75% 90% 105% 20X RAM 40% 60% 80% 100% 120% 140% Required Withdrawal Rate (based on RAM) Required % Withdrawal Rate 2% 3% 4% 5% 6% 7% Historical Success Rate % of Time Portfolio Lasted at Least 35 years between /75 Portfolio 100% 100% 93% 59% 34% 21% 65/35 Portfolio 100% 100% 98% 91% 87% 71%

23 Implementing the Ideas

24 Building an investment portfolio is like making salsa we add different ingredients together. 24

25 Large US Stock Minimal Diversification The S&P 500 Index

26 Two-Asset Diversification 60/40 Portfolio Large US Stock US Bonds

27 Diversified Portfolio 12-Asset Portfolio Large US Stock Developed Non-US Stock Real Estate Natural Resources US Bonds Non-US Bonds Cash Midcap US Stock Emerging Non-US Stock Commodities Inflation Protected Bonds Small Cap US Stock 27

28 7Twelve 7 Core Asset Classes Twelve Actual Holdings US Stock Non-US Stock Real Estate Resources US Bonds Non-US Bonds Cash Large US Stock Developed Non-US Stock Real Estate Natural Resources US Bonds Non-US Bonds Cash Midcap US Stock Emerging Non-US Stock Commodities Inflation Protected Bonds Small Cap US Stock 28

29 15-Year Growth of $10, $30,000 $25,000 7Twelve Portfolio, $26,207 $20,000 $15,000 US Large Cap Stock, $20,440 60/40 Portfolio, $22,588 $10,000 $5, Year Standard Deviation $0 29

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31 Asset Allocation Risk & Return Spectrum 15-Year Period from Risk Level Very Conservative Conservative Various Asset Allocation Models 15-Year Annualized Return (%) 15-Year Growth of $10, % Cash 1.61 $12,706 50% Cash/ 50% Bonds 3.14 $15,897 Moderate Moderate 60% US Stock/ 40% Bonds (VBINX) Diversified 7Twelve Portfolio 5.41 $22, $26,207 Aggressive 100% US Stock (VFINX) 4.88 $20,440 Crazy Chasing Last Year s Best Performer 2.42 $14,314 31

32 Asset Allocation Risk & Return Spectrum 15-Year Period from Risk Level Very Conservative Conservative Various Asset Allocation Models 15-Year Annualized Return (%) 15-Year Growth of $10, % Cash 1.61 $12,706 50% Cash/ 50% Bonds 3.14 $15,897 Moderate 60% US Stock/ 40% Bonds (VBINX) 5.41 $22,588 Moderate Aggressive Diversified 7Twelve Portfolio 6.63 $26, % US Stock (VFINX) 4.88 $20,440 Crazy Chasing Last Year s Best Performer 2.42 $14,314 32

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34 Retirement Asset Allocations ETF-based 7Twelve Retirement Portfolio Asset Class Allocations 7Twelve Conservative Retirement Portfolio 25/75 Model Option A Cash Heavy Large US Stock 3.33% Mid Cap US Stock 3.33% Small US Stock 3.33% Non-US Stock 3.33% Emerging Markets 3.33% Real Estate 3.33% Natural Resources 3.33% Commodities 3.33% US Bonds 3.33% Inflation Protected Bonds 3.33% International Bonds 3.33% Cash 63.33%

35 Retirement Asset Allocations ETF-based 7Twelve Retirement Portfolio Asset Class Allocations 7Twelve Conservative Retirement Portfolio 25/75 Model Option A Cash Heavy 7Twelve Conservative Retirement Portfolio 25/75 Model Option B Equal Bonds Large US Stock 3.33% 3.33% Mid Cap US Stock 3.33% 3.33% Small US Stock 3.33% 3.33% Non-US Stock 3.33% 3.33% Emerging Markets 3.33% 3.33% Real Estate 3.33% 3.33% Natural Resources 3.33% 3.33% Commodities 3.33% 3.33% US Bonds 3.33% 18.33% Inflation Protected Bonds 3.33% 18.33% International Bonds 3.33% 18.33% Cash 63.33% 18.33%

36 Retirement Asset Allocations ETF-based 7Twelve Retirement Portfolio Asset Class Allocations 7Twelve Conservative Retirement Portfolio 25/75 Model Option A Cash Heavy 7Twelve Conservative Retirement Portfolio 25/75 Model Option B Equal Bonds 7Twelve Moderate Retirement Portfolio 65/35 Model Large US Stock 3.33% 3.33% 8.33% Mid Cap US Stock 3.33% 3.33% 8.33% Small US Stock 3.33% 3.33% 8.33% Non-US Stock 3.33% 3.33% 8.33% Emerging Markets 3.33% 3.33% 8.33% Real Estate 3.33% 3.33% 8.33% Natural Resources 3.33% 3.33% 8.33% Commodities 3.33% 3.33% 8.33% US Bonds 3.33% 18.33% 8.33% Inflation Protected Bonds 3.33% 18.33% 8.33% International Bonds 3.33% 18.33% 8.33% Cash 63.33% 18.33% 8.33%

37 ETF-Based 7Twelve Retirement Portfolio Annual Performance (%) (Negative returns in red) 7Twelve Conservative Retirement Portfolio 25/75 Model Option A Cash Heavy 7Twelve Conservative Retirement Portfolio 25/75 Model Option B Equal Bonds 7Twelve Moderate Retirement Portfolio 65/35 Model (1.66) (0.78) (8.18) (7.61) (24.62) (0.35) 3.40 (0.95) (2.02) (1.70) (5.13)

38 ETF-Based 7Twelve Retirement Portfolio Annual Performance (%) (Negative returns in red) 7Twelve Conservative Retirement Portfolio 25/75 Model Option A Cash Heavy 7Twelve Conservative Retirement Portfolio 25/75 Model Option B Equal Bonds 7Twelve Moderate Retirement Portfolio 65/35 Model (1.66) (0.78) (8.18) (7.61) (24.62) (0.35) 3.40 (0.95) (2.02) (1.70) (5.13) 3-Year Ave Return ( ) Year Ave Return ( ) Year Ave Return ( ) Year Ave Return ( ) Year Growth of $10,000 17,559 21,648 26, Year Standard Deviation Expense Ratio of Portfolio (%)

39 ETF-Based 7Twelve Retirement Portfolio Annual Performance (%) (Negative returns in red) 7Twelve Conservative Retirement Portfolio 25/75 Model Option A Cash Heavy 7Twelve Conservative Retirement Portfolio 25/75 Model Option B Equal Bonds 7Twelve Moderate Retirement Portfolio 65/35 Model 3-Year Ave Return ( ) Year Ave Return ( ) Year Ave Return ( ) Year Ave Return ( ) Year Growth of $10,000 17,559 21,648 26, Year Standard Deviation Expense Ratio of Portfolio (%)

40 Year-to-Year Performance Best Performer in Yellow Annual Returns* Year Annualized Return 15-Year Annual Standard Deviation (as of 12/31/2015) Large US Stock % % 28.16% 10.69% 4.86% 15.80% 5.12% % 26.31% 15.04% 1.89% 15.99% 32.31% 13.46% 1.26% 4.97% 18.7% Mid US Stock -0.90% % 35.14% 15.77% 12.50% 9.99% 7.12% % 37.49% 26.26% -1.54% 15.22% 35.21% 9.40% -2.49% 8.02% 19.8% Small US Stock 13.70% % 37.19% 23.55% 6.28% 19.23% -6.92% % 30.98% 25.11% -4.20% 18.98% 36.55% 10.55% -4.75% 8.80% 19.9% Non-US Developed % % 39.68% 18.94% 13.32% 25.88% 9.89% % 26.84% 8.25% % 18.82% 21.39% -6.20% -1.01% 3.36% 21.7% Non-US Emerging -2.73% -7.29% 57.88% 26.31% 32.25% 29.20% 37.32% % 75.29% 19.44% % 19.20% -4.92% -0.07% % 8.21% 32.3% Real Estate 12.45% 3.85% 35.77% 30.87% 11.64% 35.35% % % 30.07% 28.42% 8.56% 17.63% 2.31% 30.37% 2.42% 11.04% 20.5% Natural Resources % % 34.73% 24.69% 35.63% 16.17% 33.71% % 37.07% 23.35% -7.80% 2.00% 15.54% % % 4.03% 25.3% Commodities -8.68% 24.56% 25.84% 37.15% 30.87% 16.02% 31.50% % 16.19% 11.90% -2.57% 3.50% -7.63% % % 4.32% 22.2% US Bonds 8.31% 10.12% 3.98% 4.22% 2.30% 4.21% 6.84% 8.49% 3.70% 6.25% 7.91% 3.92% -2.10% 1.37% 0.91% 4.65% 3.3% TIPS 7.68% 16.33% 8.18% 8.30% 2.59% 0.18% 11.95% -0.55% 8.94% 6.13% 13.27% 6.39% -8.49% -1.41% 0.22% 5.12% 6.5% Non-US Bonds -4.43% 21.33% 17.64% 11.53% -9.25% 6.78% 10.41% 4.21% 5.44% 3.82% 3.98% 5.85% -3.58% -2.52% 1.19% 4.53% 8.2% Cash 4.16% 1.65% 0.90% 1.11% 3.01% 4.88% 5.14% 2.77% 0.53% 0.06% 0.05% 0.04% 0.02% 0.01% 0.05% 1.61% 1.9% 7Twelve Core Model -1.66% -0.78% 27.09% 17.76% 12.17% 15.31% 11.31% % 24.90% 14.50% -0.95% 10.63% 9.72% 1.38% -5.13% 6.63% 13.1% Assuming annual rebalancing Passive ETF-based 7Twelve portfolio. 40

41 15-Year Retirement Portfolio Analysis: $250,000 Initial Account Value on Jan 1, % Initial Withdrawal 3% Annual Increase in Annual Withdrawal Total Withdrawal of $232,486

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45 AVERAGE 3-YEAR ROLLING RETURN 7.67% 5.08% The Passive 7Twelve Portfolio has outperformed the S&P 500 Index in 10 of the last 15 3-Year rolling periods. The S&P 500 Index (SPY) has had six negative 3-year rolling returns, the 7Twelve Portfolio only one. 45

46 Stop Chasing Performance 15-Year Period from Investment Approach HARE: Performance Chasing by Investing 100% in Last Year s BEST ETF 15-Year Annualized Performance HARE II: Performance Chasing by Investing 100% in Last Year s WORST ETF TORTOISE: Invest in the equally weighted 12-asset 7Twelve ETF model 6.63% 46

47 Stop Chasing Performance 15-Year Period from Investment Approach HARE: Performance Chasing by Investing 100% in Last Year s BEST ETF 15-Year Annualized Performance HARE II: Performance Chasing by Investing 100% in Last Year s WORST ETF 2.18% TORTOISE: Invest in the equally weighted 12-asset 7Twelve ETF model 6.63% 47

48 Stop Chasing Performance 15-Year Period from Investment Approach 15-Year Annualized Performance HARE: Performance Chasing by Investing 100% in Last Year s BEST ETF 2.42% HARE II: Performance Chasing by Investing 100% in Last Year s WORST ETF 2.18% TORTOISE: Invest in the equally weighted 12-asset 7Twelve ETF model 6.63% 48

49 This document is a research report presenting portfolio research and analysis. This document is neither investment advice nor an investment solicitation. Implementation of the 7Twelve portfolio is no guarantee of performance. As we all know past performance is no guarantee of future performance This is a copyrighted document, copying for redistribution is prohibited unless written permission is obtained from Craig L. Israelsen 7Twelve is a registered trademark belonging to Craig L. Israelsen Questions? me at craig@7twelveportfolio.com Copyright Craig L. Israelsen All rights reserved 49