section 1 - The American College Online Learning Center

$300,000 portfolio with a 4% withdrawal rate gives these clients $12,000. Theirincome in the first year of retirement will be nearly $40,000.g. Work longer, save more, spend less if the client’s assets are insufficienth. Cash flow planning should be done to link-up income with expenses if the client’sassets are insufficient.i. Goals need to be relative to the “dollars.”j. The safe withdrawal rate is only one pillar of the retirement income picture.Planners should look at:(1) Cash flow(2) Needs and wants(3) Social Security planningk. Planning can help any situation.3. Glide path issue, success to variability Issuea. Glide path deals with the change in equity allocation over time (as you get older,reduce equity allocation)LO 6-2-4: Understand the effect of glide path on portfolio sustainability1. Blanchett looks at which equity allocations give a person the lowest probability of failure.(Video: What is the Impact of Glide Path On the Success of a Retirement Portfolio:Tacchino, Woerheide, Milevsky)a. Initial research—constant asset allocationb. Variation 1– reduced equity allocation by 1 percent a yearc. Variation 2 — stair step rule—every 10 years Blanchett reduced the equityallocation by 10 percentd. Other variations — convex glide path (dramatic initially and then levels off) andconcave glide path (slow reduction initially and rapid later)2. The resource sought to answer the question for each scenario (a–d), which glide pathprovided the lowest risk of portfolio failure?a. The result: Constant portfolio over all ages was the best to avoid portfolio failure.b. The result: The allocation to equities should not change over time.3. Important finding — reduction in standard deviation is important4. Important finding — Blanchett looks at the probability of ruin but also looks at thevariability in portfolioa. Planners should maximize the success to variability ratio.b. Conclusion—100% equity portfolios do bestc. It is a good idea to introduce the standard deviation of the portfolio as relevant, notjust the portfolio’s failure rate.d. Blanchett came up with risk/risk ratioe. Failure rates do not capture everything.f. We need to talk about the magnitude of failure.g. Attempts to come up with the magnitude of the risk, not just the probability ofthe risk are important.h. The models count a shortfall of 1 cent as the same as shortfall of $100,000. Thisneeds to be changed and the Blanchett article gets credit for recognizing this.i. What is a practitioner to do?(1) Identify the issue6.14