A Review of “The Grangaard Strategy” by Paul Grangaard, CPA

A commenter on my post A Look at Retirement Withdrawal Strategies suggested that I check out Paul Grangaard’s book The Grangaard Strategy. So, I got a copy of the book and fininished reading it this morning. I have to say the theory behind The Grangaard Strategy makes A LOT OF SENSE!

The General Idea

1. In order for retirees to fund a comfortable retirement for 30+ years, they MUST invest in stocks. There’s really no way around it. This goes against the grain of most financial “experts” and conventional wisdom. Why must retirees invest in stocks during retirement? Inflation! Even modest inflation will eat away at a retiree’s income quickly. The only way to “beat” inflation over the long run is by investing in stocks.

2. Retirees should focus on turning their retirement assets into both an income-generating and growth portfolio.

3. Since retirees do not know how long they will live in retirement, it makes sense to plan for a long-term retirement of 30+ years.

4. A 30-year retirement will turn a retiree into a long-term investor.

5. Through research, Grangaard determined that a prudent holding period for stocks is about 10 years (10 years for large cap stocks and 12 years for small cap stocks). You’ll have to read the book to fully understand the theory behind these numbers.

6. Based on a 10-year holding period for stocks, retirees should calculate their income needs for 10 years, adjusting for inflation. For the sake of simplicity, let’s say that a retiree desires $10,000 per year for 10 years. Not factoring inflation or growth, we can assume that they will need $100,000 in income over the 10 year period. So, they would position $100,000 of their portfolio in income-producing investments (called an “Income Ladder”) like bonds, CDs, or even an immediate annuity. The term “Income Ladder” means that the income is positioned in such a way that it is allowed to grow and mature when needed. So, if you were using bonds, you could buy 9 bonds that matured nine different years. Then, you would simply live on the bond interest and principal as each bond matures. The rest of the portfolio, say $400,000 would be invested in a diversified portfolio of stocks.

7. Then after 10 years, the retiree performs the calculation again, and positions another income ladder and starts the process all over again.

What Are The Risks With The Grangaard Strategy?

There’s the risk of a long-term recession and the growth portion of the portfolio could lose money. True, this could happen. Retirees can minimize this by choosing a longer holding period for stocks, say 15 or 20 years. Of course this would mean less capital growing and more of it earning a standard interest rate, which could hurt a retiree in the long run. However, if they have a lot of capital, this may not be an issue. I hate to use worn-out sayings but “there is no free lunch.”

It might be hard to know when to sell stocks in order to position them into an income ladder. The author suggests a 10-year holding period. However, as a retiree approaches the end of a holding period, they may want to consider repositioning assets into an income ladder before the end of the 10-year period so that they don’t risk the possibility of the growth portion of their portfolio decreasing in value at the end of year ten. Make sense? The real beauty to this strategy is flexibility.

The end of the book has a number of useful (and somewhat confusing) charts along with some worksheets that will help readers assess their retirement needs. The charts confused the heck out of me until I figured out that they are meant to correspond to the worksheets.

Can This Strategy be Implemented by a Do-It-Yourselfer?

Although the strategy is not exactly simple, I do believe it can be done by a do-it-yourselfer. The author suggests that readers find a professional to work with. My only problem with this advice is that most of the professionals listed on the Grangaard website are commission-based advisors with Thrivent. As a fee-only planner, I can see how this strategy could be performed on a fee-only basis, using Vanguard products, with no need for commission-based products.

The Bottom Line

Naturally, the bigger the retirement nest egg, the better this strategy works. I HIGHLY recommend The Grangaard Strategy for ALL retirees with retirement assets. Read the book REGARDLESS of whether or not you envision yourself actually using the strategy. Why do I say that? Because the author does a wonderful job laying out the risks that retirees face.

I have just laid out a pretty good outline of the book. I’m going to do a lot more looking into The Grangaard Strategy. I suggest you do the same.

8 thoughts on “A Review of “The Grangaard Strategy” by Paul Grangaard, CPA”

  1. JLP

    I had never heard of Grandgaard but already employ much of his strategy with my clients. You are correct to highlight the necessity of keeping fees low when implementing any retirement strategy. If a 4% withdrawal rate is considered prudent for retirement assets, then it doesn’t make much sense to burn 1% to 2% on adviser fees — a quarter to one half of your annual withdrawal amount — no matter if it’s by commissions or other fees. Thanks for bringing Grandgaard’s book to everyone’s attention. It’s a very important topic.

  2. After reading Paul Grangaard and Frank Armstrong, I would add another suggestion incorporating the two bucket scenario with my earlier post on fixed and variable income funded by fixed and variable accounts. The fixed bucket should be the age 60-70 and be in a taxable account, invested in tax efficient instruments, i.e. tax frees, dividend producing equities, tax deferred REITS, pipeline partnerships, etc.

    The second bucket that kicks in at age 70 1/2 is the IRA/401 rollover that has been invested 100% in equities beginning when they were first established and left to incubate since inception. This bucket should remain invested in equities ad infinitum. This bucket would produce the variable income discussed in my earlier post, while the taxable bucket provides the fixed component of living expenses.

  3. Rather than use the conventional method of calculating what you need to retire on, I like this alternative: Plan on retiring completely debt free, then calculate what expenses you will have that are “fixed”, i.e. taxes, utilities, insurance, etc. Plan on covering this amount with “fixed” income, i.e. social security, company pension, fixed annuity, etc. Everything over and above this fixed expense is variable, (even food is variable…how often do you eat out, etc) and this is the real amount you need to cover with variable income; that is income from investments which tend to be variable from month to month and certainly from year to year. If you want to travel a lot, or dine out a lot, or have expensive hobbies, you can adjust your “nest egg” accordingly…in most cases this model will allow you to be a lot more aggressive in your investments, i.e. more equities as long as you’re willing to adjust your variable lifestyle from year to year to match the market, knowing that your fixed expenses are covered with fixed income. Play with it and see how this might change your pre-conception(s) of how much is enough

  4. I read the Grangaard book about two years ago and have tried to apply his methods to my own personal situation. After only two years, it is hard to tell how successful I will be but I plan to continue. However, in the November 2006 edition of “Consumer Reports Money Advisor” newsletter is an article “Rethinking your investment risk” by Laurence J. Kotlikoff, a professor of economics at Boston University and president of the Economic Security Planning Company. In this article he advances the proposition that most of a retiree’s investments (about 80%) during retirement should be invested in TIPs, the Treasury Inflation Protected bonds, in order to protect the retired person from the effects of inflation. He also states that stocks are very dangerous to own in retirement because of their inherent variability and henceforth the danger of the retiree’s capital disappearing. He says the longer you own stocks, the more likely you will experience a large drop that may result in irreparable harm to your financial situation. I would be interested to hear how you reconcile this with the Grangaard methodology. Does the Grangaard method trump Dr. Kotlikoff’s thesis or does the Kotlikoff concerns indicate the need for a modification of the Grangaard method?

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