By JLP | August 25, 2006
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.