Morningstar’s recent report on retirement income planning titled “Alpha, Beta, and Now…Gamma” suggests that “…making more intelligent financial-planning decisions can result in an annual return increase of 1.82% – an amount the report characterizes as a ‘significant improvement in portfolio efficiency for a retiree’.”
Here are excerpts from the report’s abstract:
“We estimate a retiree can expect to generate 29% more income on a “utility-adjusted” basis using a Gamma-efficient retirement income strategy when compared to our base scenario.” And, “Unlike traditional alpha, which can be hard to predict, we find that Gamma (and Gamma equivalent alpha) can be achieved by anyone (emphasis added) following an efficient financial planning strategy.”
I question whether the favorable results can be “achieved by anyone” without an advanced degree in mathematics.
The Savings2Income (S2I) planning method in contrast was developed as a “plain talk” approach to improving retirement income that is understandable by and transparent to the less experienced advisor and investor. Under the S2I approach, the improvement in results (retirement calculator) comes from the following:
- “F” stands for fees – reducing overall product and advisor fees improves returns on retirement savings dollar for dollar (a .50% reduction in fees improves returns by .50%).
- “FPA” stands for “fixed payout annuity” – integrating FPAs into the product allocation provides a perfect match for the income risk being addressed in a plan for retirement income. (Incidentally, FPAs typically have internal crediting rates that are more than competitive with fixed income investments that are not so perfectly matched.)
- “T” stands for “taxes” – deferring taxes for as long as possible creates significant increases in long term after tax income.
These elements under the control of the advisor or investor, together with the S2I planning method (which also addresses Social Security claiming decisions as well as the build-up of Guaranteed Income over time) produces increases in returns competitive with the Gamma phenomenon. (Future blogs based on our own research will quantify the sources of S2I improvement.)
Most importantly, S2I’s 5 Steps to Retirement Security doesn’t require a degree in advanced mathematics. You can see for yourself how this applies to your situation in plain English by visiting Savings2Income.com.