The Family Office Chronicle November 2022

Predicting the Unpredictable

To that long list of things we cannot reliably predict, let alone control–the markets, inflation, interest rates, wars, the climate, etc., we can add one — election outcomes. The recent midterms were yet another case in which the majority of pollsters utterly failed to predict the outcome. No Red Tsunami, no red wave, not even a red tide…more like a red riddle. 

This year’s polling failure is part of a trend that has emerged over the past few cycles. A new, comprehensive report from the American Association for Public Opinion Research found that surveys of the 2020 presidential contest were the least accurate in 40 years. 

The 2016 election was almost as bad. Nearly every public polling firm predicted that Hillary Clinton would win the presidency.  

There are all kinds of speculation as to what’s gone wrong with polling. Is it the “shy voter” who fears cancellation for expressing their views? Interestingly, and ironically, survey firms cannot seem to answer this basic question about surveys. 

“Elections have consequences,” as the saying goes. Investors may want to examine the historical record to help them navigate the coming cycle, the two years before the next “most important election of our lifetimes”. 

Despite the overheated rhetoric and hysteria that so often accompanies political campaigns, the result of this recent election may provide some real comfort to investors who are concerned about their security in retirement. 

Although the final counts are not yet in (as of November 14th), it seems the result is likely to be a divided government: the White House and the Senate controlled by the Ds, and the House led by the Rs. A check of the record shows that combination has historically been most advantageous for equity investors.

Good News, Bad News

First the bad news: divided governments can have difficulty resolving issues like the debt ceiling, high inflation, and working through a recession. This hat trick of thorny problems makes for a difficult economic environment going forward, but opinions vary as to whether the inherent challenges to new legislation are a good thing or not. 

At least the debt ceiling will likely be resolved fairly soon: last month the national debt exceeded $31 trillion, nearing the statutory ceiling of roughly $31.4 trillion. We will have to wait to see if the lame-duck session can produce a compromise, or if the parties see a red-meat issue to kick off 2023.

Inflation (more on that topic later) isn’t something generally fought by Congress; dealing with inflation is the Fed’s problem, and their tool is interest rates. Among the threats to a market recovery, rising interest rates present the toughest challenge.

Many economists link rising interest rates with recessions, which in turn can hurt corporate profits. It seems the only certainty available at this point is uncertainty. 

Now the good news: Historically, the stock market has performed well both after midterms and also when control of government is divided between parties.  Looking at data going back to 1950, a period covering 18 midterm elections, the markets have risen in the year following a midterm. The average gain in the year following a midterm has been 14.4%. The S&P 500 has enjoyed a positive return in every year following a midterm since World War II.

This year’s outcome — a shift from full Democrat control to a divided outcome — has happened three times since WWII. That includes 1995, which saw the S&P 500 rise 37.58%. In the other two, 1947 and 2011, returns were more modest, at 5.71% and 2.11%, respectively. 

To get very specific, stocks have seen their best post-election performance when a Democrat president is counterbalanced with Republican control of either or both houses of Congress, the situation that seems likely to exist now:

Let’s add another data point from the historical record: the Presidential Election Cycle theory.  According to research from Charles Schwab, since 1933, in the third year of a presidential term, market performance has been the best:

Year after the election: +6.7%

Second-year: +5.8%

Third-year: +16.3%

Fourth-year: +6.7%

Over the long haul, market performance has generally been up, which is reflected in these nominal numbers. After inflation, the average annual return of the S&P 500 has been +6.34%. Without question, year three has been the biggest contributor. 

Capturing that long-term positive performance has always been a function of patience and discipline, and 2023 will be no exception. Despite the favorable historical record, we can’t make any predictions about what will actually happen. 

We found a quote that sums up this situation. It’s from Isabel Barrow, Director of Financial Planning for Edelman Financial Engines:

“We analyzed how the S&P 500 performed under different administrations and political parties between 1948 and 2021.  Here’s what we found — no political party substantially impacted long-term market returns, and no election outcomes can hurt your portfolio more than your own impulsive behavior.”

Retirement Insecurity — Let’s Get Wonky

Inflation has made daily life a challenge for most Americans, with energy up over 17% in the past year and food up 10.9%. This has created real problems for retirees living on a fixed income. But it’s also making things tough for Americans struggling to build up their nest eggs.

Retirement readiness in America is a mess overall. Proof of this is the fact that nearly half of all Americans have no retirement savings at all. For many, living solely with Social Security income will be no picnic: the average benefit at 65 in 2022 is about $2,484 per month, a little under $30,000 per year

Retirement planning often fails for one or more of five reasons. Commonly used investment planning methodologies solve some of these five problems but not others. And keep this in mind: all five of these conditions may exist at the same time.


Investing for retirement at the wrong time in the stock market cycle can devastate your plan. As an example, if you are withdrawing a fixed amount of money from each of your investments on an annual basis, and your investments go down by 30%, you will deplete your principal at a potentially unsustainable rate and damage your plan’s viability. A little math experiment may bring this point home: let’s say a retiree is currently withdrawing $40,000 per year from their $1M nest egg. That’s a 4% withdrawal rate, right? Seems safe enough. But if the market dipped 30% and their portfolio dropped to $700,000, $40,000 just became a 5.7% withdrawal rate — a number most, if not all, financial planners would deem unsustainable. Now the client has got a tough choice — take a big bite out of their nest egg, or cut their income for that year from $40,000 to $28,000, which is 4% of $700,000. 


Inflation is the silent killer of retirement success. Many investors plan for retirement without considering inflation. Over a 20, 30, or even 40-year retirement, which is not unreasonable given the fact that Americans are living much longer, the effects of inflation can cut purchasing power in half, or even worse. While we can’t predict what inflation will be like in the future, we can remind investors that for the ten-year period of the 1970s, it averaged 7.8% per year and was 13.5% in 1980. It’s not the set amount of money the client needs every year that matters, it’s the goods and services— food, clothing, shelter, transportation, energy, and healthcare—that that money buys. 


Life expectancy in the USA has increased by about 10 years in just the last half-century. Revolutionary medical technologies such as biotech and genomics will likely create a much larger increase in life expectancy over the decades to come. Planning to spend down your money by age 80 just might miss the mark by 20 years or more. For example, in Summit County, Colorado, a person born today is predicted to have an average life expectancy of 98.9. Maybe this fact will bring it home: the CSO tables Insurance carriers commonly use age 121 as the age when whole life policies will endow. 

Risk Drift

Many investors plan the next thirty years of their lives based on the risk and return assumptions of their current investments. But, as people age they usually prefer safer, though lower returning, investment portfolios. If appropriate changes in investors’ returns over time are not included in a plan, then the plan might look good now but be more likely to fail in the future. Most would agree that 80% in stocks with a 30-year time horizon is sensible, but how many would take on that kind of risk with only a five-year horizon? It seems to us inevitable that investors will become shy about risk as they get older, yet traditional retirement income planning solutions too often do nothing to solve this problem. 

The Human Element

Deeply rooted in our primitive psyche is the fight or flight response. Humans developed this acute stress response in order to survive. Unfortunately, our proclivity to protect against hazards, often by running away, makes humans genetically unsuited for investing. When markets get scary our instincts tell us to sell. Fight or flight causes scared investors to sell at the wrong times. Warren Buffet, arguably the world’s greatest investor, advised, “Be fearful when others are greedy and greedy when others are fearful.” Unfortunately, most investors succumb to their primal instincts and fail by doing exactly the opposite. 

Investors and their advisors have spent decades trying to solve the challenges of income planning for retirees. Like so much of the industry’s output, we observe that the solutions proposed always seem to focus either on the purely rational or on the emotional, but not both. To a great degree, this reflects the divide between retail and institutional investors. 

Two common retirement planning methods are (1) systematic withdrawal planning and (2) bucket planning.

Systematic Withdrawal Planning

Systematic withdrawals are an alternative to owning dividend and interest-paying securities to provide income. Analysis has shown that income may be derived instead from any growth-oriented, liquid investment simply by liquidating and withdrawing those investments periodically. Systematic withdrawal planning starts by determining two key variables: the investor’s risk tolerance and how much income the investor wants to withdraw from their savings and investments every year.

The investor then determines whether the investments are able to support this income requirement. The “4% rule” is a common methodology-often referred to as a “back of the envelope” calculation — if the percentage of investments required per year is less than 4% of the corpus, then the investments should be able to support the desired income. If the investor is very conservative, then rather than 4%, 3% might be used as a guide. 

But, the systematic withdrawal methodology can fail the investor if the stock market declines shortly after the plan is initiated because investors might have to sell stocks when they are cheap to create income, thus quickly depleting the portfolio. In addition, investors are often unable to stick to the plan during down markets, as they are not certain of the investments’ ability to provide the income they require. 

Systematic planning may work well for a computer system and can be better than owning low-yielding bonds and dividend-paying stocks, but in our experience offers little in support of the human being involved. 

Bucket Planning

Bucket planning also starts by determining how much money the investor wants from the investments — of course it does, that is the variable every income plan solves for. 

The concept of bucket planning is to break down future cash flow needs into discrete time segments. Each time segment is referred to as a bucket, and each bucket is typically intended to hold five years’ worth of income needs. A major weakness in this approach is that bucket planning typically does not re-optimize the client’s risk allocations as time progresses but rather sticks to the original plan, simply spending down the money in each bucket one after the other and doing so in reverse order of riskiness. 

Bucket planning may fail as a lifetime income program because it typically does not adjust which investments to use for spending during normal versus down markets. In other words, it is specifically not time optimized.

Both bucket planning and systematic withdrawals address some of the retirement income puzzle, but only the recently developed Time Optimized Planning™ (TOP) approach solves all of the five principal reasons that retirement plans fail. Let’s review: 

Because both systematic withdrawals and bucket planning allow for principal at risk investments, they may both be said to reduce inflation risk, just as TOP does. 

Time-optimized planning is designed to avoid the age-old problem of selling low. Rather than simply spending down assets in reverse order of their riskiness, meaning spending cash equivalents, then bonds, and finally stocks, TOP seeks to provide income from assets that have performed best in each period. If the market is up in a given year, income is derived from stocks. If the market is down or still recovering, less volatile investments are used. TOP is to be rerun every year and, when the market is fully recovered and growing, money is moved back into less volatile securities to reposition the portfolio for the next decline.

Systmatic withdrawals and bucket planning may be fairly categorized as “set it and forget it” plans, and on the surface, that may appear to be appealing. TOP requires the investor to monitor and potentially rebalance the portfolio annually. We believe the extra work required by TOP is more than justified by its potential financial and psychological benefits to retirees. 

Systematic withdrawals may avoid retirement timing risks if the withdrawals are taken as sell rebalances: less or none will be withdrawn from stocks and more from cash and bonds during down markets, and similarly, more will be taken from the risky assets during up market moves.  This is something bucket planning does not do and is not intended to do: and this is a big reason why we feel bucket planning is deeply flawed. 

TOP is engineered specifically to buttress the client against retirement timing risk — the risk that the stock market will experience a significant drop early in the income years. 

Bucket planning, however, may be useful in dealing with the human element by focusing the client on the need for lifetime income and by deferring the time until risky assets are needed. 

Because TOP can be reoptimized every year, taking into account changing situations and life events, as well as market events, longevity risks are reduced. This is not the case with systematic withdrawals; in fact, longevity risk may be the most serious flaw with systematic withdrawals. 

Investors taking a fixed amount of money every year may simply spend all of the money before they die; clients taking a set percentage may see the number of dollars they receive shrink to the point where costs are not covered. Both are failures of the planning process, and in our view, of the planner. 

There is a question about how well bucket planning deals with longevity risks because it lacks the flexibility to take profits to provide income during up markets, relentlessly spending down principal protected assets until they are depleted, and leaving the retiree in the uncertain position of invading principal during down markets, and doing so when the client is entering the final phase of their income needs. You can see the potential for a double whammy: a serious decline in account value when there is too little time for a recovery, and it’s easy, if pretty awful, to imagine the impact on the emotions of the retirees.  

Finally, accounting for risk drift is a major feature of TOP, which is designed specifically to respond to the realities of human aging. TOP is intended to reduce risk in income-generating investments to near zero in the last several years of the client’s life. This also has the powerful benefit of negating the client’s fight-or-flight instincts during bad market events. Neither bucket planning nor systematic withdrawals solve that problem and, in fact, may often exacerbate it. 

There is another safety net built into TOP. Many investors don’t want to spend all their money on themselves, preferring to leave a legacy to loved ones or charity. TOP segregates this money into a separate account. The implication of this is some additional safety cushion for the investor. This end-of-plan goal money is typically invested in principal at-risk investments because it is intended for a much longer-lived individual and, therefore, should have a longer-term, more risk-loving orientation. Although the client doesn’t intend to spend this money, it can provide additional peace of mind that they do have the wherewithal in the event it should be needed.

If you are concerned about your security in retirement or concerned that your existing financial plan may not account for the various threats that may exist, we can provide you with a customized Incomize™ retirement income report. There is no cost or obligation for your Report; it’s a part of our Family Office services. 

Set it and forget it approaches may have a certain appeal for clients who don’t like to think about the future and what it may bring, but Incomize can offer something more and better: true peace of mind. To get your report set up a short conversation with me to start the process.