Bogleheads University 501 2023 - Retirement Portfolio Designs with Dana Anspach

Episode Overview

• This episode explains why structuring a retirement portfolio for decumulation (spending down) is fundamentally different and more complex than structuring one for accumulation (saving up).
• It introduces the concept of goal-oriented portfolio design, where the primary objective isn't just maximizing returns but achieving specific outcomes like income stability or minimizing worst-case scenarios.
• The speaker breaks down the critical impact of "sequence of returns risk" during retirement and why early losses combined with withdrawals can be devastating.
• Several alternative portfolio construction strategies are explored, including the "Retirement Income Frontier" and "Minimax" portfolios, as ways to hedge against the unique risks faced by retirees.

Key Concepts

• Decumulation vs. Accumulation: The rules and risks of investing change significantly once you begin withdrawing money. The strategies that work for growing wealth (accumulation) can be "dangerous" when trying to generate a lifetime income (decumulation).
• Sequence of Returns Risk: In retirement, the order in which you receive your investment returns is critical. Poor returns in the early years of withdrawal can deplete a portfolio much faster than poor returns later on, even if the long-term average return is the same.
• Goal-Oriented Portfolios: Instead of focusing solely on maximizing returns or risk-adjusted returns (Sharpe ratio), portfolios can be structured to achieve specific goals. This includes maximizing income security, maximizing the minimum expected gain (Minimax strategy), or providing a predictable cash flow.
• The Retirement Income Frontier: This is an alternative framework to the traditional "Efficient Frontier." It evaluates portfolio strategies based on their ability to generate annual income (consumption) and preserve assets for legacy, rather than just plotting risk versus return.
• Income Ladders: A strategy of creating a predictable stream of income for a set number of years (e.g., 10 years) using safe investments like bonds, CDs, or annuities. This protects near-term spending needs from stock market volatility.

Quotes

• At 01:37 - "The best analogy I've heard is it's like you go out, you play your first nine... holes of golf... you go back out, and instead of golf, you're on a hockey rink." - Explaining how the "game" of investing and its inherent risks change dramatically when shifting from saving for retirement to living in retirement.
• At 02:33 - "First, how do we define outcomes?" - Emphasizing that before choosing a portfolio strategy, an investor must first clearly define their personal goals, whether it's lifestyle, income security, or leaving a legacy.
• At 08:33 - "The solutions that work for retirement income are not the same solutions that work when you're in the accumulation phase. He even says that using some of the same tools that you use in accumulation might be dangerous." - Citing research to highlight the fundamental shift in strategy required during the decumulation phase to avoid common pitfalls.
• At 24:41 - "What would an all-weather portfolio look like? ...We could design a portfolio to maximize the minimum gain, or to maximize the outcome in a worst-case scenario." - Introducing the "Minimax" strategy, which prioritizes protecting against the worst possible outcomes over simply maximizing average returns.
• At 29:43 - "Evaluate portfolios relative to the goal, not by comparing returns of one to another." - A concluding principle advising retirees to measure success by whether a portfolio meets their specific life goals, not by how it performs against arbitrary benchmarks.

Takeaways

• Define your specific retirement goals first. Your primary objective (e.g., maximizing income, protecting against the worst-case, leaving a legacy) should dictate your portfolio strategy.
• Recognize that the decumulation phase introduces new risks, primarily sequence of returns risk. Your portfolio structure must be designed to mitigate the impact of early market downturns.
• Consider bucketing strategies, such as building an "income ladder" with safe assets to cover near-term expenses, allowing the rest of your portfolio to be invested for long-term growth.
• Evaluate your portfolio's success based on its ability to meet your plan's cash flow needs and goals, rather than by simply comparing its returns to a market index.