Friday, January 21, 2011

Retirement at the Casino

Clients and others who have seen us speak, read our material, or know us at all, understand that we at Butler|Philbrick & Associates don't make any investment decisions without a proper understanding of the odds, and the range of possible outcomes. We are optimists, but err on the side of caution.

The Quantitative Wealth Management Analytics Group, or QWeMA Group, based out of the Fields Institute near the University of Toronto, also embraces this focus on probability, and has applied it to the field of retirement planning in a novel way.

Traditional retirement plans have no way of accounting for the range of possible future outcomes, in the markets, with inflation, or in your own lifespan. The QWeMA Group's solution, on the other hand, accounts mathematically for the full range of possible outcomes, and assigns a probability to retirement success. As you will see in some of the videos produced by QWeMA's founder, Dr. Moshe Milevsky, a closer inspection of traditional plans shows that they will fail up to 50% of the time. For an in-depth case study about the vulnerabilities in traditional retirement plans, please see our article in Dental Practice Management's December issue, starting on page 36.

The following video by Dr. Milevsky explains the tradeoffs facing retirees, and how they can effectively plan for their future by finding an optimal mix of retirement income, product mix, and investment strategy. The video is over 17 minutes long, but grab your spouse, a glass of wine, and invest in your future. Be sure to return to this article after watching by hitting your browser's 'Back' button.

Welcome back!

Dr. Milevsky demonstrated how you can alter the sustainability of your retirement by reducing your income and altering your product mix. He also illustrated how different income levels and product mixes affect retirement sustainability and the legacy you leave behind.

There are other ways to improve your retirement options that Dr. Milevsky did not discuss in the video. One of the ways is to broaden your investment opportunity set to include international stocks, commodities, REITs and alternative strategies, in addition to domestic stocks and bonds. If you are like most Canadian investors, your portfolio is focused almost exclusively on Canadian stocks. While this has worked out well over the past ten years, investors may be missing important future opportunities by sticking so close to home. Further, adding even a very simple risk management system, such as the timing system we described in our Ontario Dentist article, can improve your sustainable retirement income by over 50%.

As an example, for a couple with a $1,000,000 retirement portfolio, following this simple system would have increased sustainable income from less than $50,000 per year for a traditional balanced portfolio, to over $90,000 per year. The same applies to expected legacy, where this simple investment approach would have more than doubled the amount left behind at the end.

Chart source: Ontario Dentist (2010)