A New Methodology to Retirement Planning

As far as Retirement Planning is concerned, I believe the 60/40 Portfolio Is Dead.

Getting your asset allocation right is one of the fundamental rules of building a successful portfolio. Being over or underweight in a specific asset class could skew your returns or increase your risk. A traditional model approach is a 60/40 portfolio, which divides assets between equities (60%) and fixed income (40%).

The following concerns have created new ways of thinking about this approach.

• Increasing longevity results in the need for more growth
  • The 60/40 approach was created a long time ago and people are now living a lot longer which means they generally need more growth to make their money last longer.
• The markets are evolving
  • The 60/40 approach was created in a very different interest rate environment. The expectation for bond returns was greater and interest rates were higher. As interest rates have hit generational lows the returns on bonds in the form of coupons and principal growth has to be re-evaluated. The coupons clipped from bonds are often lower than inflation which means the income may fall short both now and even more so in the future. And as interest rates rise the prices of bonds (which move in the opposite direction) will decrease resulting in lower principal if sold prior to maturity.
• Medical Care
  • Long Term Care and other elderly medical expenses are becoming a much larger issue. This approach was created long before afflictions such as Alzheimer’s and Dementia were as prevalent as they are now. As people live longer with diseases such as these, more is required of their financial assets to cover the costs associated with the care.

At JorMik Capital, we think there is a better way

We favor a laddered approach to retirement planning. Laddering is an investment technique whereby clients can choose to use multiple financial products mixes depending on when assets are expected to be needed to fund various retirement goals. These product mixes are separated into what we will refer to here as “Tranches.”

1. Tranche One. We have a mutual fund model portfolio designed to assume less risk than a client’s typical portfolio and usually place about two years’ worth of cash needs into it. This portfolio is a combination of equity funds and fixed income funds that provide for diversification as well as potential growth and income.

2. Tranche Two. In this portfolio, the client would have a more aggressive mutual fund portfolio that would be 70/30 or 80/20 weighted towards equities depending on the client’s risk appetite.

3. Tranche Three. In this portfolio, the client may choose to have a small amount of their assets in a portfolio of individual stocks. This is optional to the client but provides the potential for more growth but also comes with much higher risk.

We believe using this new methodology for retirement planning is a better option than the traditional 60/40 approach due to the current market environment combined with the typical longevity and heath care expenses of many retirees. If you would like to discuss this methodology in more detail please call Jordan Kerner at 475-619-2240.