RetireWell Part 5: Investment Philosophy for a Retiree Client

This is the 5th instalment of our retirement series. In my previous writings, I shared how I used our proprietary tool “RetireWell” to give our client David (aged 59), a reliable income stream throughout his retiring years. In gist, David’s retirement objectives are:

$10,000 per month for the first 5 years
Reduce to $8,000 per month for the next 10 years
Finally, to $6,000 per month till age 83

At the end of age 83, he wants to have $1 million to leave behind for his loved ones or use it for himself if he lives longer.

Very briefly, based on what David wants, we allocated $1.479 million of his money, together with his rental income and proceeds from his insurance policies into various “buckets” shown in table 1.

Table 1: How RetireWell Optimizer Allocated David’s Resources

Monies in income bucket are used to buy annuities while bucket 2 is used to buy bonds. The monies in the rest of the buckets are invested in portfolios as shown in table 2.

Table 2: How the various buckets are invested

The portfolios were executed using low-cost instruments such as ETFs, indexed funds from Vanguard or evidence-based investment funds from Dimensional Fund Advisors. We also do not make predictions and changes to the asset allocation of the portfolios because of market news or historical trends. In short, we will not time the markets. So, did our investment philosophy work for the retiree client?

Chart 1: 2016 Event Timeline

Graph Source: Bloomberg. Chart: MSCI All Country World Index (net div.)

If you have been investing through 2016, you will know that throughout those 12 months, many analysts through various media channels have made many calls to move out of equities. They have predicted it to be a year when stock markets will crash. And they have of course good reasons for it. 2016 started with the continuation of sell-off in the emerging markets since 2015 due to fears of slowing growth in Asia. S&P500 was also at all-time high at the beginning of the year. Then there were of course the fears over Brexit and the results of the US elections. But we stuck on to our philosophy and these were the results in table 3:

Table 3: Portfolio returns across buckets

By ignoring calls to time the markets, as well as using low-cost instruments, we simply rebalanced the portfolios when necessary. If you look at chart 1, you will realize that if you heeded those market timing calls, you would have been wrong completely and missed the returns. While this way of investing calls for discipline and courage to ignore the noise, it allows our retiree client to reap the returns as well as avoid the stress of having to guess where the markets would be. And in truth, as it has been consistently shown, even professionals get it wrong most of the time.

The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Wealth Advisory Firm. The edited version has been published in The Business Times on 29 April 2017.

Here are the links to the other 10 parts of the RetireWell Series:

We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.