1. Advisory Solutions
MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 1
ADVANCING THE FUTURE OF INVESTMENT ADVISORY SOLUTIONS
CONNECT
KNOW
GROW
Lawrence Sinsimer
Consultant, HPWT, LTD
Founding Member, MMI Board of Governors
The Retirement Conundrum
PERHAPS MOST
IMPORTANT,
[THE BOOMERS
ARE] THE FIRST
GENERATION
IN AMERICAN
HISTORY COMING
INTO RETIREMENT
FACING THE NEED
FOR A BLOCK OF
MONEY THAT, ON
AVERAGE, WILL
HAVE TO LAST
DECADES.
June 2015
We have all seen the statistics regarding the Baby Boom generation
hitting the age of retirement. The Boomers—the largest generation in
American history—are turning 65 at the rate of one every 11 seconds,
or about 10,000 per day. This began in 2011 and will continue through
2029, peaking in 2022. This generation is unique in American history,
having lived through higher interest rates and higher inflation rates than
any prior generation. It is the generation that saw the end of the Cold War
and the beginning of distrust of government and its agencies. Perhaps
most important, this is the first generation in American history coming into
retirement facing the need for a block of money that, on average, will have
to last decades.
Up until the Baby Boom generation, the so-called “golden years” were
a far shorter span. Retirement included a dinner, a gold watch, and a
guaranteed pension assuming the retiree had worked long enough to
achieve one, not to mention lived long enough to enjoy it. The Boomers
face a very different reality. Life expectancy has increased dramatically
over the past two decades. According to the Society of Actuaries, there is

2. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 2
a 50% chance that one partner in a couple age 65 will live to age 92 and
a 25% chance that one will live to age 98. Ironically, this generation, which
has lived through the highest interest rates of any generation, now faces
a long retirement with interest rates at record lows. More important, this
generation must rely on themselves or their financial advisors to determine
the proper allocation for their assets so that they have the income
necessary to support this long retirement.
A recent AARP survey found that in retirement, Americans’ biggest fear is
outliving their wealth. Their second biggest fear is dying. In other words,
they would rather be dead and rich than alive and poor!
While there are many questions, there seem to be fewer answers. So how
did we get here? How did we go from a guaranteed pension with assets
invested by professionals to meet those guarantees, to being the largest
generation in American history coming into retirement with savings that
must be prudently invested to provide the income necessary for what on
average will be a retirement lasting almost 30 years?
Pension Legislation and Its
Unintended Consequences
In 1961, President John F. Kennedy created the President’s Committee
on Corporate Pension Plans in response to numerous complaints from
employees cheated out of their pensions. The movement for pension
reform gained some momentum when the Studebaker Corporation closed
its plant in 1963. Its pension plan was so poorly funded that Studebaker
could not afford to provide all employees with their pensions. After
the failure and a three-year investigation by a Senate subcommittee,
several pieces of legislation were introduced in 1965 and 1967 that
increased regulation on pension funds, setting new fiduciary standards for
plan trustees.
On September 12, 1972, NBC broadcast an hour-long television special,
entitled “Pensions, Broken Promises,” that presented to millions of
Americans the consequences of poorly funded pension plans and onerous
vesting requirements. In the years that followed, Congress held a series
A RECENT
AARP SURVEY
FOUND THAT IN
RETIREMENT,
AMERICANS’
BIGGEST FEAR IS
OUTLIVING THEIR
WEALTH. THEIR
SECOND BIGGEST
FEAR IS DYING.
IN OTHER WORDS,
THEY WOULD
RATHER BE DEAD
AND RICH THAN
ALIVE AND POOR!

3. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 3
of public hearings on pension issues, and public support for pension
reform grew significantly. As a result, on September 2, 1974, the Employee
Retirement Income Security Act (ERISA), primarily sponsored by Senator
Jacob Javits of New York, was signed into law by President Gerald Ford over
the objections of business groups and labor unions, which sought to retain
the flexibility they had enjoyed under pre-ERISA law.
On the surface, ERISA seemed like a very good thing for employees. No
longer could they be terminated prior to age 65 and receive nothing. More
important, plans had to be funded and benefits vested over a prescribed
time period. ERISA did not require employers to establish pension plans,
nor did it dictate whether those plans were defined benefit or defined
contribution. Under ERISA, pension plans were required to provide for the
vesting of employees’ pension benefits, and employers were obliged to
satisfy certain minimum funding requirements.
The Pension Benefit Guaranty Corporation (PBGC) was established by
ERISA to provide coverage in the event that a terminated defined-benefit
pension plan did not have sufficient assets to provide the benefits earned
by participants. In 1974, the vast majority of pension plans in America
were defined-benefit plans. Defined-benefit plans provide retirees with a
certain level of guaranteed benefits based on years of service, salary,
and other factors. Prior to ERISA, some defined-benefit pension plans
required decades of service before employees’ benefits became vested.
It was not unusual for a plan to provide no benefit at all to employees who
left employment (voluntarily or involuntarily) before the specified age of
retirement (65), regardless of the length of their service.
The law contained several onerous provisions for those employers who
sponsored defined-benefit plans. Underfunded plans were assessed
a penalty by the PBGC in the form of an excise tax. Vesting schedules
and actuarial assumptions, along with plan performance, had to be filed
annually with the Department of Labor. Funding needed to be kept current,
and contributions were required whether the employer was profitable
or not.
This was especially onerous for employers whose businesses were cyclical
in nature. In the years when a company was profitable, the economy
ON THE SURFACE,
ERISA SEEMED
LIKE A VERY
GOOD THING FOR
EMPLOYEES.
NO LONGER
COULD THEY BE
TERMINATED
PRIOR TO AGE
65 AND RECEIVE
NOTHING. MORE
IMPORTANT, PLANS
HAD TO BE FUNDED
AND BENEFITS
VESTED OVER A
PRESCRIBED TIME
PERIOD.

4. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 4
likely was also good, so the pension fund investments did well. However,
in those years when business was down, maybe even running at a loss,
the pension fund return was likely to be under pressure. Regardless, the
employer was required to make the contribution to the plan (with some
allowances to make it fully funded over a three-year period). The inability
to predict the cost of annual pension contributions weighed heavily on
cyclical companies.
In order to make their expenses more predictable, many employers froze
their defined-benefit plans and shifted to defined-contribution plans.
Defined-contribution plans provide retirees with benefits based on the
amount and investment performance of contributions made by the
employee and/or the employer over a number of years. Many of these
defined-contribution plans were profit-sharing plans in which the employer
made a contribution based on the profitability of the company during a
fiscal year. Employee contributions and employer deposits were invested
by the employer for the benefit of the participants. This provided the
ultimate flexibility to employers, who thus could reasonably predict what
their contribution level would be each year and specifically determine the
amount, as it was tied to profitability. Consequently, defined-contribution
and, specifically, profit-sharing plans gained popularity in the late 1970s
and early 1980s.
However, there was one fly in the ointment: as employees began to retire
and as they looked at the performance levels of their accounts, many
became dissatisfied with the returns their employers had achieved.
Lawsuits were filed on behalf of employees, alleging breach of fiduciary
responsibility, failure to properly diversify pension-plan portfolios, and
failure to achieve results competitive with those of similarly designed
plans over the same time period. Employers who had switched from
defined-benefit plans because of the failure to reasonably predict annual
contributions now found themselves at risk for future liabilities based
on the performance of the funds. Employers began to look for a solution
where they could provide for retirement benefits, but avoid the risks of
investment returns. This solution came about accidentally in a little noticed
provision of the Revenue Act of 1978.
EMPLOYERS
BEGAN TO LOOK
FOR A SOLUTION
WHERE THEY
COULD PROVIDE
FOR RETIREMENT
BENEFITS, BUT
AVOID THE RISKS
OF INVESTMENT
RETURNS.
THIS SOLUTION
CAME ABOUT
ACCIDENTALLY IN
A LITTLE NOTICED
PROVISION OF THE
REVENUE ACT OF
1978.

5. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 5
The Accidental Birth of the 401(k)
In 1978, the Carter administration proposed a law to cut tax rates, add a
credit to benefit middle-income taxpayers, limit deductions for business
meals, and raise taxes on some capital gains. At that time, the threshold
for tax brackets wasn’t indexed for inflation, meaning that unless Congress
acted, more people were being bumped into higher brackets each year. A
bipartisan coalition in Congress resisted the President’s plan and began
assembling its own bill, pulling together ideas proposed by a variety
of lawmakers.
The primary goal of what became the Revenue Act of 1978 wasn’t
retirement savings; it was tax cuts for the middle class and lower levies on
capital gains to spur business investment. As an afterthought, Republicans
wanted a proposal that could provide incentives for individual retirement
savings. Representative Barber Conable, the top Republican on the Ways
and Means Committee, suggested the add-on related to profit-sharing
plans—an add-on that became section 401(k). Conable had been talking
to businesses such as Xerox Corporation and Eastman Kodak Company,
both of which were a major presence in his congressional district in
upstate New York. According to former Congressman Jim Jones of
Oklahoma, 401(k) was not considered an expensive proposition from the
standpoint of revenue loss. At that particular time, it looked like defined-
benefit plans would be the order of the day for years and years to come.
The 869-word insert, authored by staffer Richard Stanger, was lost in
the political heat of limits on tax-deductible three-martini lunches, lower
capital-gains rates, and a bipartisan coalition that was rejecting President
Carter’s proposals. How 401(k) grew from being an insignificant provision,
to being a financial giant that transformed retirement savings and started
an industry that holds $4 trillion in Americans’ assets is a study of the
sometimes unintended consequences of Congressional actions. At
the time, it was estimated that the additional provision would have a
“negligible effect upon budget receipts.” Currently, defined-contribution
plans are the fifth largest tax break for individuals, with an estimated
revenue loss to the government of $61.4 billion in fiscal year 2014.
HOW 401(K) GREW
FROM BEING AN
INSIGNIFICANT
PROVISION, TO
BEING A FINANCIAL
GIANT THAT
TRANSFORMED
RETIREMENT
SAVINGS AND
STARTED AN
INDUSTRY THAT
HOLDS $4 TRILLION
IN AMERICANS’
ASSETS IS A
STUDY OF THE
SOMETIMES
UNINTENDED
CONSEQUENCES OF
CONGRESSIONAL
ACTIONS.

6. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 6
The 401(k) law passed as old-fashioned pension plans were under
attack. Public companies, which were required to account for the pension
liabilities, were worried about their costs and were looking for a way
to eliminate those liabilities. The law took effect in January 1980. In
1981, the Treasury Department issued regulations fully enacting the law
into action.
It wasn’t long before people such as Ted Benna, co-owner of the Johnson
Companies, a benefits consultancy, stepped in. Benna realized the power
of the 401(k) and helped to popularize it, leading to his being recognized
as the “father of the 401(k).”
The 401(k) enabled employees to contribute to a plan on a pretax basis
and to choose the investment vehicles. The funds also grew on a pretax
basis. Additionally, provisions allowed the employer to match contributions
up to certain maximums. The investment risk for those contributions were
borne by the employee. Given the flexibility of the 401(k) and the shift of
investment liability to the employees, the number of 401(k) plans grew
to some 513,000 in 2011 from approximately 17,000 in 1984. Active
participants increased to about 61 million from an estimated 7.5 million
during this same time period. Defined-benefit pension plans fell to roughly
43,800 in 2011 from approximately 165,700 in 1984. This downward
trend for defined-benefit plans continues today.
As the first “401(k) generation” ages, questions continue to multiply about
the adequacy of their finances and the wisdom of 401(k)s. Whether they
like it or not, the Baby Boom generation has seen the transition from the
defined-benefit plan, with a guaranteed pension in retirement, to a plan
that allows flexibility—but puts the investment risk squarely on often ill
equipped and emotionally driven employees and retirees.
Retirement Planning for the
401(k) Generation
There is no shortage of books, pamphlets, and articles written about
the need for good retirement planning. However, putting all of this advice
into action has been challenging and, for the most part, ineffective.
WHETHER THEY
LIKE IT OR NOT,
THE BABY BOOM
GENERATION
HAS SEEN THE
TRANSITION
FROM THE
DEFINED-BENEFIT
PLAN, WITH A
GUARANTEED
PENSION IN
RETIREMENT, TO A
PLAN THAT ALLOWS
FLEXIBILITY—
BUT PUTS THE
INVESTMENT
RISK SQUARELY
ON OFTEN ILL
EQUIPPED AND
EMOTIONALLY
DRIVEN
EMPLOYEES AND
RETIREES.

7. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 7
In September 2014, a Wall Street Journal article entitled “The Money
Conversation Americans Needs to Have” (Caroline Geer) pointed out that
Americans would rather talk about sex than money. Quoting from surveys
conducted by Northwestern Mutual and Wells Fargo, the article pointed out
that 42% of pre-retirees surveyed have never spoken to anyone about their
retirement plans and only 39% have spoken with their spouse or partner on
the subject. According to these surveys, the biggest obstacles to improving
one’s financial health were lack of time and lack of knowledge. Apparently,
even if people had the time to talk about finances, they still didn’t know
where to begin. According to studies conducted by Fidelity, over 80% of
pre-retirees acknowledge the need for a written retirement income plan, yet
78% admit to not having one at retirement.
Complicating matters is the fact that there are no rulebooks, blueprints,
or game plans providing instructions on how to begin the conversation on
retirement. There is no history to look back upon for guidance regarding
how to proceed. While books and pamphlets lay out a framework or
roadmap for talking about retirement, they ignore one of the most
important issues: retirement is as much an emotional event as it is a
financial one. People tend to define themselves by what they do, as much
as by who they are. Upon retiring, they suddenly are faced with no longer
being able to do that. Yesterday, they had a job, a title, a salary, paid
vacation, and benefits. Today, they have a sum of money that must last
the rest of their life. Another complication is that it is difficult to plan for
a retirement that, on average, will last 27 years. Most people seem to
be able to set financial goals for three to five years out, but planning for
decades can be extremely daunting.
Luckily, there are ways to simplify the process. Step 1 is to sit down—
hopefully, with a financial advisor included in the conversation—and ask
the following questions: “When do we want to retire?” “Where are we
going to retire?” “What do we want our retirement to look like?” “How
much income do we need to support this lifestyle?” “How do we prepare
financially so we can achieve the retirement that we want?”
COMPLICATING
MATTERS IS
THE FACT THAT
THERE ARE NO
RULEBOOKS,
BLUEPRINTS,
OR GAME PLANS
PROVIDING
INSTRUCTIONS ON
HOW TO BEGIN THE
CONVERSATION ON
RETIREMENT.

8. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 8
When Do We Want to Retire?
Many people fantasize about retiring early, especially since Social Security
benefits, albeit reduced, are available at age 62. While on the surface,
early retirement appears attractive, assuming the 25% reduction in
Social Security benefits can be absorbed, it’s important to remember that
Medicare doesn’t kick in until age 65.
The current cost of health insurance for a married couple age 62, with
a $2,000 deductible and a $1 million lifetime maximum, is over $2,000
a month. This equals more than $24,000 a year, multiplied by the three
years until age 65 is reached, or $72,000, assuming no increase in
premiums. This number translates into $125,000 pretax. The “when” of
retirement is extremely important and can be complex as, for example, in
cases where spouses are different ages, particularly if both are working.
An advisor can be especially helpful here. He or she may need to speak
with each spouse individually regarding their views on when to retire. This
issue can be even more complicated if the retirement is forced or the
result of poor health.
Where Are We Going to Retire?
Another critical component of the retirement conversation is to identify
where those golden years are to be lived out. The cost of living varies—
often quite dramatically—state to state, especially with respect to pension
and investment-income taxation. Likewise, healthcare costs and access
to medical care vary by location. The discussion regarding where to live
often leads to conflict between emotional desires and economic reality. For
example, a couple may wish to live near their children and grandchildren,
but that might not be cost-effective. Hobbies and pastimes also need to
be considered. Finally, the state of one’s health is an important factor
in deciding where to retire. It’s also important to note that retirement
doesn’t have to be in one place; a couple might opt to maintain a primary
residence in a lower-tax state with a better climate and also purchase/rent
an apartment close to their children’s house. This can provide the best of
WHEN DO WE WANT
TO RETIRE?
WHERE ARE WE
GOING TO RETIRE?
WHAT DO WE WANT
OUR RETIREMENT
TO LOOK LIKE?
HOW MUCH
INCOME DO WE
NEED TO SUPPORT
THIS LIFESTYLE?
HOW DO WE
PREPARE
FINANCIALLY SO
WE CAN ACHIEVE
THE RETIREMENT
THAT WE WANT?

9. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 9
both worlds—a location that the children and grandchildren might want to
visit and a place where the couple can stay when they come to visit their
children and grandchildren.
What Do We Want Our
Retirement to Look Like?
Many people approach retirement as if it were a long vacation. In the
beginning, this may be the way retirement minutes are filled. However, after
so many cruises, hiking trips, and golf outings, the reality of retirement
sets in. Every day is not another vacation day; it’s a Saturday or a Sunday.
When facing a lifetime of Saturdays and Sundays, how a retired couple
wishes to fill those hours becomes increasingly important. Once again,
economic and emotional issues come into play as couples deal with their
vision of retirement. From a monetary standpoint, a couple may be able to
take an unlimited number of cruises or play golf every day. Or, conversely,
they may have to curtail some of the luxuries they enjoyed while they
were working. From an emotional standpoint, this may leave them feeling
unfulfilled, unchallenged, or stagnating intellectually.
When defining what your desired retirement will look like, key questions
to ask yourself might include: “Do we enjoy spending time together?” “Do
we have hobbies that we share?” “Do we want to do volunteer work or
be involved with our church or community services?” “Do we both enjoy
travel and entertainment?” “Do we have friends in common or do we travel
in different circles?” “Are we close to our families and do we both enjoy
spending time with them?” The answers to these questions will be critical
in determining the best way to fill all of those “weekends.” A financial
advisor can be invaluable here.
How Much Income Do We Need
to Support This Lifestyle?
By not asking this question at the very beginning of the conversation, it
might seem as though we’ve put the cart before the horse. However, it’s
necessary to first identify the “when,” “where,” and “what” before the
...IT’S NECESSARY
TO FIRST IDENTIFY
THE “WHEN,”
“WHERE,” AND
“WHAT” BEFORE
THE “HOW
MUCH” CAN BE
CALCULATED IN
TERMS OF DOLLARS
AND CENTS.

10. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 10
“how much” can be calculated in terms of dollars and cents. Studies
have shown that for most individuals or couples, close to 100% of their
pre-retirement income will be needed when they retire, barring a dramatic
change in economic circumstances, e.g., downsizing/paying off a mortgage
or, conversely, buying a second home, a boat, or an RV. Most people know
how much money they earned, how much they paid in taxes, and how much
money they saved. Very often, the mystery lies with where the rest of it
went! In order to get a firm handle on the income required in retirement,
it is important to do a simple income statement. List expenditures for
housing, taxes, utilities, travel, entertainment, medical care, insurance,
charitable contributions, and gifts. The checkbook and end-of-the-year
credit card statements are great tools in helping determine the various
categories of expenditures.
Oftentimes, couples significantly underestimate the amount of money
they spend on vacations, restaurants, and gifts. Having the cold, hard
facts in front of them is the best way to accurately determine the amount
of income required. Unless there is some reasonable expectation that
these expenses will decline in retirement, it’s important to assume that
many of these costs will increase in tandem with inflation. In the case
of healthcare, the current rule of thumb is to expect that the cost will
continue to rise at twice the rate of inflation.
How Do We Prepare Financially So We Can
Achieve the Retirement that We Want?
For most retirees, Social Security is the only guaranteed benefit they will
receive. If the retiree has earned annually the maximum covered by Social
Security, his or her retirement benefits, along with the spousal benefit,
can be substantial—between $40,000 and $50,000 a year. In addition,
a lucky few may have a frozen defined-benefit plan that will provide some
guaranteed income benefits in retirement. Subtracting these guaranteed
benefits from the projected necessary annual income leaves a balance that
must be made up from investment income from any existing 401(k)s and
from other savings. Keep in mind that this income has to grow over time
to meet the three toughest challenges in retirement: longevity, inflation,
SUBTRACTING...
GUARANTEED
BENEFITS FROM
THE PROJECTED
NECESSARY ANNUAL
INCOME LEAVES A
BALANCE THAT MUST
BE MADE UP FROM
INVESTMENT INCOME
FROM ANY EXISTING
401(K)S AND FROM
OTHER SAVINGS...
THIS INCOME HAS
TO GROW OVER
TIME TO MEET THE
THREE TOUGHEST
CHALLENGES IN
RETIREMENT:
LONGEVITY,
INFLATION, AND
RISING HEALTHCARE
COSTS.

11. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 11
and rising healthcare costs. Complicating matters further are the risks of
improper asset allocation and distributing too much annually in the early
years, resulting in the very real chance that the accumulated wealth will
be outlived.
Longevity
Due to better diet, improved medical treatment, and genome research, the
Baby Boomers may live significantly longer than they anticipated. As stated
earlier, there is a 50% chance that one partner in a couple age 65 will live
to age 92 and a 25% chance that one will live to age 98. The adopted plan
needs to provide an income stream that will last many years.
Inflation
If there is an irony facing retiring Boomers, it lies in the fact that they have
lived through the highest inflation and interest rates in American history,
only to find themselves retiring in a prolonged period of low interest rates
and inflation. However, despite inflation currently being low, no one can
predict with any certainty what will happen over the next 25–30 years. Even
low inflation has a detrimental impact on cost-of-living over time. At 3%
inflation, the cost of goods and services doubles over 24 years. To put this
into context, a retiree needing $50,000 of income to maintain their living
standard in 1999, required $70,000 in 2014.
Healthcare
Healthcare costs, which are currently rising at twice the annual CPI,
represent the highest expense retirees face, after food and shelter. With
aging comes increasing dependency on medicine and medical procedures
to maintain activity and quality of life. Knee, hip, and lens replacements
have become the norm rather than the exception. Pills to maintain blood
pressure, cholesterol levels, and sex lives are also now typical for aging
seniors. Hopefully, competition will drive some of these costs down over
time, but who knows how much the next big discovery or “fountain of
youth” will cost?
IF THERE IS AN
IRONY FACING
RETIRING
BOOMERS, IT
LIES IN THE FACT
THAT THEY HAVE
LIVED THROUGH
THE HIGHEST
INFLATION AND
INTEREST RATES
IN AMERICAN
HISTORY, ONLY TO
FIND THEMSELVES
RETIRING IN
A PROLONGED
PERIOD OF LOW
INTEREST RATES
AND INFLATION.

12. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 12
Asset Allocation
Among the difficult issues facing retirees, finding the right mix of
investments to provide a steady, growing stream of income to maintain
one’s lifestyle has to be the toughest. There is no way to predict the
economic conditions retirees will need to navigate decades into the future.
To illustrate this point, if a couple had retired 27 years ago in 1988, they
would have been facing a stock market that had crashed the previous
October and investors shunning stocks in favor of bonds, money funds,
and CDs yielding 9%–10%. They may well have told their advisor to forget
stocks and to instead ladder some bonds or CDs for income, i.e., the
perceived “safe” route. Had this been the approach taken in 1988, the
couple could have afforded to dine at Morton’s, the exclusive steakhouse,
twice a week. By 1991, it would have been dinner at Outback once a week.
By 1999, they would have been down to the early-bird special at Olive
Garden once a month, and if still alive today, the far-less-happy retirees
would have found themselves living in their kid’s basement surviving on
the McDonald’s Dollar Menu. Each time the couple reinvested those “safe”
bonds and CDs, their rate of return went down while their cost of living
went up. If there was no “set it and forget it” strategy that existed in 1988,
when rates were high, how can retirees expect to find this kind of solution
today, when interest rates have never been lower? In short, they can’t.
Assets will need to be managed in retirement as actively as they were
during the accumulation phase—or more so. It’s vital to recognize that the
asset allocations that worked over the past 27 years will not produce the
same results over the next 27. Witness the 10-year U.S. Treasuries having
gone from yielding 8.7% at the beginning of 1988 to yielding 1.9% at the
beginning of 2015. The future cannot be an average of the past. So, how
best to tackle the seemingly overwhelming task of allocating assets so
that a retirement that could last decades will be appropriately funded to
meet the set goals? The answer: by breaking it down into little “bites.”
Instead of trying to find a “set it and forget it” solution for the next 27
years—there is none—and becoming frustrated to the point of giving
AMONG THE
DIFFICULT ISSUES
FACING RETIREES,
FINDING THE
RIGHT MIX OF
INVESTMENTS
TO PROVIDE A
STEADY, GROWING
STREAM OF
INCOME TO
MAINTAIN ONE’S
LIFESTYLE HAS TO
BE THE TOUGHEST.
THERE IS NO
WAY TO PREDICT
THE ECONOMIC
CONDITIONS
RETIREES WILL
NEED TO NAVIGATE
DECADES INTO THE
FUTURE.

13. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 13
up—which seems to be what happens, according to the Northwestern
Mutual and Wells Fargo studies—one suggestion is to plan for just the first
three years of retirement.
We have already identified the when, where, and what of retirement. We
have also now calculated how much income is needed on top of the
guaranteed stream from Social Security and any existing pension plans. As
a recommended next step, take three years’ worth of that income and put
it in cash, money-market funds, short-term CDs, or bonds; in other words,
an account that will not go down in value regardless of market conditions.
Three years of liquidity provides a cushion to ride out market downturns. If
you had retired at the end of 2007, the equity markets were near all-time
highs. Fifteen months later—March 9, 2009, to be exact—the world
appeared to be coming to an end. However by the end of 2010, markets
had recovered 93% of the downturn. Three years of liquidity should take
up about 15% of your accumulated assets from your 401(k) and other
savings. If it is less, you might want to keep four years liquid. If it is
more, you may want to re-examine your spending or else consider working
part-time once you retire.
Now that we have established our spending account, we need to create
an account designed to replenish it. This account will need to be invested
to stay ahead of inflation, yet still be geared to protect capital. We will
call this our Capital Preservation account, and our benchmark will be
inflation-plus-1%. Why use inflation as the benchmark instead of a mix
of stock and bond averages? Because in retirement, the only meaningful
benchmark is inflation. If we don’t stay ahead of inflation, our lifestyle and
standard of living will decline year after year. If our goal is inflation-plus-1%,
and we will start drawing on the account after a year, with a goal of
not refilling it for 10 years, our allocation will be 65%–70% short and
intermediate bonds, including some high-yield bonds, treasury inflation-
protected securities (TIPS), and floating rate securities. The balance
could be made up of dividend-paying utility stocks, real-estate investment
trusts (REITS), preferred stock, convertible bonds, and master limited
partnerships (MLPs), depending upon risk appetite. This account should
SO, HOW BEST
TO TACKLE THE
SEEMINGLY
OVERWHELMING
TASK OF
ALLOCATING
ASSETS SO THAT
A RETIREMENT
THAT COULD LAST
DECADES WILL BE
APPROPRIATELY
FUNDED TO MEET
THE SET GOALS?
THE ANSWER:
BY BREAKING IT
DOWN INTO LITTLE
“BITES.”

14. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 14
represent about 35% of accumulated assets. In those years where returns
are two to three times higher than our goal, it might make sense to pour
more into the spending or liquidity account.
The balance of our assets, which should represent 50% of our
accumulation, will be invested in a long-term growth account that we may
not touch for 10 years. The benchmark for this account is inflation-plus-5%.
Why inflation-plus-5%? We know that inflation is far more onerous on
the elderly. Healthcare costs rise faster than the CPI with no employer
picking up part of the cost. An often-overlooked cost that rises over time
is maintenance. Even if we remain in our homes as we age, it becomes
necessary to hire people to do those routine chores that we were able to
do in our younger days, e.g., clean the gutters, mow the lawn, and wash the
windows. If our stated goal is inflation-plus-5% over a 10-year period, our
allocation needs to be 85%–90% equities including a mix of large-, mid-,
and small-cap U.S. stocks, along with some international and emerging
markets. The balance can be invested in alternatives including REITs
and some commodities. Again, this depends on risk appetite. While this
account should be set up with the mindset that it might not be touched
for 10 years (other than rebalancing), this does not preclude moving some
of the assets into the Capital Preservation account if, in some years, our
returns are two or three times our goal.
Why would three separate accounts be necessary instead of just one? The
answer is that it’s prudent to marry investor behavior with asset allocation.
Should the investor see his or her entire account drop 25%–30%, as would
have been the case in 2008–2009, he or she likely would have panicked
and cashed-out. However, by separating accounts into Liquidity, Capital
Preservation, and Long-Term Growth, these accounts will be viewed as
meeting different needs for different time frames. Consequently, knowing
that they always have three years of spending on hand, investors are less
likely to panic.
If one were to back-test this approach with these allocations starting in
1999, prior to the “tech wreck,” and using a moderately conservative risk
profile employing only index funds (no alpha, just beta), the result would
be that a client with $1 million, withdrawing 5% ($50,000) a year in 1999,
WHY WOULD
THREE SEPARATE
ACCOUNTS BE
NECESSARY
INSTEAD OF
JUST ONE? THE
ANSWER IS THAT
IT’S PRUDENT TO
MARRY INVESTOR
BEHAVIOR
WITH ASSET
ALLOCATION...
BY SEPARATING
ACCOUNTS INTO
LIQUIDITY, CAPITAL
PRESERVATION,
AND LONG-TERM
GROWTH, THESE
ACCOUNTS WILL
BE VIEWED
AS MEETING
DIFFERENT NEEDS
FOR DIFFERENT
TIME FRAMES.

15. MMI advisory solutions ViewPoint | Lawrence Sinsimer | June 2015 15
Money Management Institute
1737 H Street, NW
Fifth Floor
Washington, DC 20006
(202) 822-4949
www.MMInst.org
CONNECT
KNOW
GROW
growing to withdrawing 6.8% ($68,000) by 2014, would have withdrawn
$768,000 by the end of 2014 and had a remaining account value of
$1.2 million—despite having gone through two of the worst bear markets
in history.
While there is no single solution to the Retirement Conundrum, the author,
having made hundreds of presentations to advisors and their clients on
this topic over the past several years, has found this to be an approach that
resonates with individuals and couples close to or in retirement.
About the Author
Larry Sinsimer is a 40-year veteran of the financial services industry and a
past recipient of the MMI Pioneer Award in recognition of his contributions
to the evolution of the advisory solutions industry. Throughout his career,
Mr. Sinsimer has held leadership posts at several major firms, helping
them to design and implement innovative investment solutions for financial
advisors and their clients. Until recently, he was Senior Vice President of
Practice Management for Fidelity Financial Advisor Solutions.