“What use could this company make of an electric toy? [the telephone]”

William Orton, President, Western Union

“We don’t like their sound and guitar music is on the way out”

Decca Recording regarding the Beatles, 1962

“I think there is a world for maybe five computers.”

Thomas Watson, Chair IBM, 1943

RETIREMENT INCOME

PLANNING FOR TOMORROW

THE NEXT “BIG THING”

Walter UpdegraveDeena KatzMitch Anthony Lewis WalkerDonald G. MacGregorMitch AnthonyDr. Matthew GreenwaldJim C. OtarProf. Cynthia SaltzmanRobert CurtisApril K. CaudillProf. Moshe A. MilevskyAnna AbaimovaHarold EvenskyProf. Laurence BoothWilliam P. BengenRobert KreitlerLou StanasolovichRoxanne AlexanderMichael AndersonDouglas HeadProf. Roger G. IbbotsonMichael C. HenkelPeng Chen

WHAT DO OUR CLIENTS WANT?

HOW DO THEY PLAN ON GETTING

THERE?

Leaping tall buildings in a single bound is nice but can you outperform the S&P index?

THE SOPHISTICATES

THE MASSES

ARE THEY “RATIONAL”?

Say, what’s a mountain goat doing way up here in a cloud

bank?

NO!

“Only 24% of Americans Fear

Outliving Savings”

Financial Advisor

One baby boomer will turn 59 1/2 every seven seconds between 2005 and 2025.

WHAT DOES THIS MEAN FOR REETIREMENT INCOME

PLANNING?

TROUBLE

CASH FLOW STRATEGY: CLEARING

THE HURDLES

We must take into consideration the primary risk factors that can hobble an otherwise thoughtfully crafted solution.

Once the risk factors are enunciated, practitioners have a set of criteria against which they may test proposed product and strategy solutions.

MORTALITY REALITY

LONGEVITY

Probability of a 65-year-old living to various ages

0%

25%

50%

75%

100%

65 70 75 80 85 90 95 100 105

MaleFemaleAt least one spouse

Age

78 81 86

85 88 91

91 93 96

Pro

bab

ilit

y

86

91

MORTALITY REALITY

HEALTH

Squaring The CurveSquaring The Curve

0

2

4

6

8

10

0 10 20 30 40 50 60 70 80 90 100AGE

PerfectPerfect

DeatDeathh

Health Health StatusStatus

SquaredSquared

Traditional

MORTALITY REALITY

INFLATION

• Unanticipated inflation is a greater risk factor for the retired than it is for the rest of the population

• The CPI-E (for the elderly), the retiree inflation index outpaced the regular CPI during the last 20 years by almost 1% per year.

MORTALITY REALITY

VOLATILITY & LUCK

90% “FOR SURE”

MONTE CARLO TO THE

RESCUE

THE TRADITIONAL

SOLUTION

THE “INCOME” PORTFOLIO

Dividends and Interest The

paycheck syndrome

MYTH I’m Retired so I need...

MRS BOONE NEEDS 5% CASH FLOW

Bond Cash Flow Stock Cash Flow TotalAllocation from Bonds Allocation from Stock Cash Flow

100% 7% 0% 0% 7%90% 6.3% 10 0.3 6.8%80% 5.6% 20 0.6 6.2%70% 4.9% 30 0.9 5.8%60% 4.2% 40 1.2 5.4%50% 3.5% 50 1.5 5.0%40% 2.8% 60 1.8 4.6%

CASH FLOW vs.

REAL INCOME

NOMINAL

REAL

-$4,000.00

-$3,000.00

-$2,000.00

-$1,000.00

$0.00

$1,000.00

$2,000.00

$3,000.00

$4,000.00

$5,000.00

$6,000.00

1 2 3 4 5 6 7 8 9 10

“INCOME PORTFOLIO”

Fidelity Intermediate

Bond

Fidelity Intermediate & Vanguard S&P

“TOTAL RETURN”

“EXCESS”ANNUAL CASH FLOW

I’m poor!

I’m rich!

$100,000.00

$110,000.00

$120,000.00

$130,000.00

$140,000.00

$150,000.00

$160,000.00

$170,000.00

1 2 3 4 5 6 7 8 9 10 11

PORTFOLIO VALUE

“INCOME PORTFOLIO”

“TOTAL RETURN”

CLIENT NEEDS

An effective strategy must meet our clients' Financial and Behavioral Needs.

• Cash flow (as from total-return portfolios) vs. Income (as in dividends and interest)

• Consistent cash flow

• Real cash flow

• Tax and expense efficiency

CLIENT NEEDS - FINANCIAL

CLIENT NEEDS - BEHAVIORAL

• Paychecks are consistent• Paychecks are market independent• The source of paychecks is visible and

considered reliable• Clients understand paychecks; they

need to understand their cash flow strategy

• Separate pockets.

SUCCESSFUL INVESTORS DO NOT

AVOID RISK,

THEY MANAGE IT!

THE E&K CASH FLOW STRATEGY

BREAKING THE PAYCHECK SYNDROME

THE TOTAL

PORTFOLIO

CASH FLOW RESERVE

THE INVESTMENT PORTFOLIO

CASH FLOW RESERVE

THE INVESTMENT PORTFOLIO

2 YEARS CASH FLOW

5 YEARS LUMP SUM

BALANCE OF PORTFOLIO

REINVESTMENT OF ALL INTEREST & DIVIDENDS

ADJUSTED AS NECESSARY FOR OPPORTUNITY COSTS

CASH FLOW RESERVE

THE INVESTMENT PORTFOLIO

PERSONAL CHECKING ACCOUNT

Regular Monthly

Payments

the “PAY CHECK”

Rebalance

Refill

DOES IT ADDRESS THE

CLIENT’S NEEDS?

As the reserve requirement is reviewed regularly (in our practice the review is quarterly), it’s quite easy to increase the reserves to adjust for inflation. The strategy also provides the flexibility to increase the reserve by variable amounts to reflect an inflation factor unique to each client.

Purchasing Power Risk

By providing significant control over the timing of investment liquidations, most cash flow related volatility drain can be eliminated.

Volatility

The strategy provides extraordinary flexibility in meeting the unique and changing needs of real clients.

• Tendency for excess reserves• Variable needs• Unanticipated needs• Tax management opportunities• Minimize transactions & related costs

Financial Flexibility

It manages the paycheck syndrome

• Cash flow is consistent • It is independent of market volatility• The source is visible and reliable • Clients understand the strategy• It frames the accounts in a manner

consistent with a client’s separate-pocket mentality

Client Needs/Behavioral

CASE STUDY

5% Real Cash Flow

$40,000

DOES IT WORK?

1987

2000 -2001

19

68

19

69

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

TEST OF WITHDRAWL STRATEGIES

INITIAL INVESTMENT - $1,000,000INITIAL WITHDRAWAL - 4 1/2%

BOND PORTFOLIO

50% / 50% PORTFOLIO

E&K-S PORTFOLIO

E&K CASH FLOW STRATEGY