Perspectives: The Role of Rules

There’s an unresolved debate in the investment community about the importance of maintaining exposure to equities in a retirement portfolio in retirement.   One argument is that a 40-60% allocation to equities in the post-retirement time frame may be too conservative.

One-size-fits-all statements are tricky because they can be invalidated with a single counter-example.  The same applies to received retirement wisdom such as the 4% withdrawal rule or the 80% rule for replacement income needed in retirement.

So do you throw out the rules or the tools based on them?

A generic rule may have value if on average it gets people to save more for retirement or thrive longer in retirement.  But we need to acknowledge that “on average” is a low bar because averages are measures of ignorance. If we knew the specific values of relevance, we would not need to rely on averages as a dim light to the future.  Given the wide range of client situations, there will also be specific situations where rules may be so wrong they can be worse than no rule at all.

Several RIIA thought leaders have written papers highlighting issues with industry rules and related software applications.  All highlight a key point – rules and the tools that are based on them are flawed – sometimes dangerously so.  One needs to learn their specific limitations before applying them in general practice.

We believe that best practices start with the client, seeking to understand their wants, needs and expenses in retirement.  For one client, having an equity portfolio of 40-60% in risky assets may be the smartest thing to do.  For another – it may put their retirement at risk.

A starting point for planning has to be ascertaining the type of client you are working with and developing a plan accordingly.  RIIA’s Household Balance Sheet Analysis offers a starting point for this and an approach that allows an advisor to build a portfolio around all four retirement allocations: Upside, Floor, Longevity and Reserves.



Francois Gadenne
Co-Founder, Chairman & Executive Director

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