Retirement Income Tax Strategies – Financial Planning Association General Public Website
Author: Jason Branning
Jason K. Branning, CFP®, RICP® is co-founder of Modern Retirement Theory.
Harry Markowitz’s paper “Portfolio Selection” published in the 1952 Journal of Finance and subsequent works that have built on these ideas by Markowitz and others, has had a profound effect on the investment philosophy of advisors, foundations, endowments and individuals. The seed of Portfolio Theory set forth in 1952 has indeed become a full grown tree at this point.
The investment community’s thought process is imbedded in Portfolio Theory. Debates center on active vs. passive investing, optimized allocations, and safe withdrawal rates. The assumptions of Portfolio Theory have explained the risk/return relationship in terms of beta, standard deviation, alpha, covariance and Monte Carlo simulations. The goal of managing a portfolio to get the most possible return for the least amount of risk is indeed noble and desirous.
Modern Portfolio Theory’s mathematical sophistication supports the notion that over time, equity markets are the best place to make money over and against other assets, inflation and taxes. Portfolio risk can be reduced through specific optimizations, while recognizing that systematic or market risk cannot be eliminated. These risk computation metrics have been demonstrated over extended periods and then converted into averages that are quite attractive.
Our focus is on how Portfolio Theory has been applied to those near or in retirement. Is it possible that these historical averages purported by Portfolio Theory have lulled advisors and consumers into accepting too much risk during the retirement phase? Thus far, this risk has been accepted by trying to sustain a retirement plan based on an income-producing, market-based portfolio. MRT questions if that is really the best approach for individual retirees.