NEW YORK — Financial advisers can safely increase their clients’ retirement income by 50% or more by structuring withdrawals differently, according to a certified public accountant who specializes in retirement income planning.
Instead of the 4% to 4.5% drawdown rate typically suggested by Monte Carlo models, sustainable, inflation-adjusted annual withdrawal rates of 6.6% of client assets are possible through a combination of bond laddering early in retirement, long-term equity investing and annuity purchases, according to Paul Grangaard, founder of PAG Inc., a St. Paul, Minn., firm that specializes in adviser training.
He is marketing his approach as a possible solution to what many perceive as a retirement income crisis. Advisers who use what Mr. Grangaard calls the Grangaard System include those at Thrivent Financial for Lutherans of Appleton, Wis., and USAllianz Securities of Minneapolis.
“It’s not a free lunch, but it’s a sensible approach to positioning retirement money,” said Jim Nicklaus, a senior life sales consultant for Farm Bureau Financial Services in West Des Moines, Iowa, who uses the system.
“The 6.6% withdrawal rate can be achieved if the client does not invade principal or give in to emotions,” he said, noting that clients who get nervous and sell stocks in a falling market won’t get the intended benefits.
“[The Grangaard System] appears to be an intelligent approach to setting aside some money that isn’t subject to the volatility of the stock market,” said Ilene Davis, principal of Financial Independence Services. The Cocoa, Fla.-based firm manages $50 million in client assets.
“But it seems to me that the strategy could be derailed if there are unexpected surprises, such as a lump sum needed to fix the roof,” said Ms. Davis, who uses laddering strategies but not Mr. Grangaard’s system. She added that some of the assumptions he makes — including rates of return up to 12% and averaging 8.8% for 30 years — seem too aggressive.
The Grangaard System assumes a 30-year retirement broken down into six five-year holding periods. Bond ladders of U.S. Treasury securities, single-premium immediate annuities, money market mutual funds, certificates of deposit or other investments with fixed rates of return, and maturity dates are used in the early years to ensure a certain minimum income.
In subsequent periods, retirees invest more aggressively in stocks. Fixed-income laddering reduces the risk that portfolios will “crash and burn” during temporary market tumbles or that retirees will be forced to sell in down markets, Mr. Grangaard noted.
That substantially improves their chances of getting the benefit of long-term growth of the market without having to ride the roller coaster of inevitable ups and downs, he added.
Mr. Nicklaus puts clients into cash equivalents or other highly liquid investments for the first five-year period, and fixed annuities and bonds for the second five-year period. More stocks are integrated into the plan in subsequent periods, with the fifth ladder being virtually all stocks.
The sixth ladder can include a life option annuity with lifetime benefits so the client never runs out of income, Mr. Nicklaus added.
The strategy may be a less costly alternative to fee-heavy variable annuities with income guarantees, Mr. Grangaard said. However, annuities can play a role in the strategy for assets — such as inheritances — not in tax-deferred accounts, he noted.
Most clients don’t care all that much about the sustainable withdrawal rates that Mr. Grangaard stresses, Ms. Davis said. “They are more concerned about having enough money to sustain their lifestyle,” she said.
More retirement income probably would be welcomed by baby boomers, as about three-quarters of them thought that they might not have enough money to fund future pursuits — especially during their busy first five years of retirement — according to a recent survey of 2,000 people over age 50 conducted by Sun Life Financial Inc. of Toronto.
“The survey shatters the old rule that people should plan to live on
a fixed 70% to 80% of their pre-retirement income,” said Mary Fay, senior vice president and general manager of Sun Life Financial’s annuities division.