Modern Retirement Theory

Welcome to the first in a three-part series on Modern Retirement Theory (MRT).  Over the course of three articles, we will outline and describe why it is so important for both clients and their advisors to understand and implement MRT concepts going forward.

Modern Retirement Theory (MRT) is an area that we (Cannon) not only embrace but have expanded to include some additional concepts and processes that we feel will make it easier to implement. MRT is not to be confused with MPT (Modern Portfolio Theory).  Modern Retirement Theory is a comprehensive retirement planning process created to offer customized solutions for each individual retiree. The goal of this proprietary process is a retirement plan that is secure, stable, and sustainable for the retiree's lifetime [1].

Let’s begin with historical reflection, starting with retirement planning and interest rates of the 1970s and 1980s. During that twenty-year period, the “baby boomer” generation observed their parents plan for and start to live in retirement. A life status “boomers” believed they could emulate.   The post-WWII generation welcomed the ability to generate livable income streams without invading principal while taking only a moderate amount of stock market risk. We also observe that in January of 1970 the Fed Funds Rate was 9.5% and rose to over 19% by the end of the decade.  It did not fall back to the 9% range until July of 1989.

However, the subsequent three decades tell another tale altogether. During the decade of the ’90s, Fed Funds Rates peaked.  By December of 2000 rates fell to 5.41 but since have dropped to 7 basis points as of February of 2021.  Now, when we correlate the past reality of fixed income investing with the most recent two decades in the stock market, we, retirement planners,  see that the S&P 500 produced a zero rate of return in the 2000s and a 13.6% in the 2010s.

With this past forty years of market history as a basis, we have decided to turn to Modern Retirement Theory as the future standard.  MRT represents a significant shift and focus away from only the accumulation and growth of retirement assets to planning for the protection and utilization of assets in a tax-sensitive manner in retirement. For that reason, Cannon has not only embraced Modern Retirement Planning but also is now expanding on and promoting this concept with the support from various software programs available in the marketplace.

We believe that clients are seeking from fiduciaries a reframed discussion concerning retirement that is individualized to their unique household situation and NOT based merely upon rules of thumb such as: “100 minus your age”, or “The 4% Rule” or “The Required Minimum Distribution Rule”, etc. We believe that Modern Retirement Theory has a great deal of merit and should be the underpinning a fiduciary looks to when discussing a retirement plan.  

Now, for the remainder of this article, let’s outline the six major premises of MRT in order to allow you to fully engage with the philosophical underpinnings of it and make a decision if it makes sense for you and your clients. Hopefully, it will motivate you to start thinking about how you can successfully frame and implement its precepts into your fiduciary practice via a disciplined, understandable, and repeatable process.

According to the creators of Modern Retirement Theory, Branning and Grubbs [1], the first of the six premises is: Retirement is an Absolute Goal. The creators interpret this premise by stating that the outcome of the process is a guaranteed sustainable lifestyle through retirement. We will discuss this further in parts two and three of this series.

The second premise is entitled: Individualized and Client Centric. This, in the author’s opinion, is one of the most intriguing facets of MRT as it focuses on individuals rather on group statistics and historical data. We concur with this concept as we view each household as unique and that each should have its own plan.

The third premise makes a great deal of sense as it states that: Outlook Ambiguity - The Future is Unknowable to the Individual, then a retirement plan must incorporate some type of contingency plan within it to address those Black Swan Events that we all experience in life.

In the fourth premise: Secure, Stable, and Sustainable, MRT focuses on the behavioral finance concept of individuals fearing that they might run out of money during their retirement years and become a burden on their family or society in general. We will discuss a few additional behavioral finance concepts related to this topic in upcoming articles.

The fifth premise of Modern Retirement Theory, entitled, Balance Sheet, refers to a concept that Cannon has promulgated for decades, namely that of a comprehensive view of the household’s entire balance sheet, not merely its investable assets.

The final tenent, Funding Priority, refers to the process of establishing the client’s priorities, needs, wants, and wishes for the next stage of their life, and then matching realistic cash flows to fund prior to instituting a plan.

Things have changed and will continue to change! The approaches, tools, and processes we utilize to implement a successful retirement program for ourselves and our clients need to adapt to these changes as well.  In our next installment, we will share our view of how to frame this discussion for your practice, individual retirees, and their households (Part 2). The final installment will outline how you might bring it all together, by structuring and articulating a household retirement plan based on the client’s holistic balance sheet integrated with their life goals and aspirations, not just what they have saved/accumulated in their retirement plans and IRAs.

Resources:

[1] http://modernretirementtheory.com

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