RETIREMENT INCOME PLANNING: How the Rules of Investing Change

While Asset Allocation continues to serve long-term growth investors well, the approach was not designed to address the unique needs of the 21st-century retirement income investor.  

When first introduced by economist Harry Markowitz as ‘Modern Portfolio Theory’ in 1952, the concept was so well received and quantitatively sound, Markowitz was awarded the Nobel Prize in Economics for his work. 

At the time, Americans had two primary forms of retirement income: Social Security and employer-sponsored pensions. Both income sources provided a lifetime income stream whose guaranteed nature allowed retirees to avoid the need to invest in volatile capital market instruments to reach their retirement income goals. This stands in stark contrast to the highly complex retirement planning landscape both retirees and financial advisors are confronted with today. 

Although arguably the soundest principle for growth investing, Asset Allocation does not sufficiently take into consideration the ultimate objective of producing income from a portfolio to meet the needs of today’s retiree.  

Retirement income planning has become far more complex as the only remaining source of guaranteed income for many is Social Security. Beyond their monthly Social Security payment, the balance of a retiree’s income is expected to be provided by systematically liquidating the retirement savings they’ve accumulated in 401(k) plans, and the like. This systematic liquidation must be carefully crafted and closely monitored to sustain the income for the balance of the retiree’s life. While this may sound simple, it’s not. One only need look at the endless amount of research published on this topic since 2000 to understand just how difficult it is to replace the economic value of a guaranteed pension with self-funded accounts. 


Taking a traditional asset allocation approach for an income investor is flawed in that it fails to consider the unique challenges posed by managing money to provide income rather than managing money for growth alone. The distinction between the two is crucial. In the accumulation or growth phase, investing systematically in the face of market volatility creates the opportunity for an investor to “average down,” via dollar-cost-averaging, the cost per share of a capital market instrument. However, dollar-cost-ravaging occurs when one experiences the same type of volatility while divesting systematically for the purpose of providing income. 

Ironically, the dynamics of dollar-cost-averaging, which serve the needs of savers so well, are the ultimate catalyst for the dreaded dollar-cost-ravaging during the distribution phase. Specifically, the phenomenon occurs during the income phase as a direct result of systematically divesting a fixed amount of assets every month, regardless of share price, which causes the limited number of shares held in a portfolio to be disproportionately devoured in months when prices are down. To make matters worse, an unprecedented level of volatility in the capital markets beginning at the turn of this century directly coincided with the retirement of the first generation in history largely responsible for self-funding the balance of their retirement income needs. 


Given the capital-intensive nature of utilizing an Asset Allocation approach to provide retirement income, it is our fundamental belief that the underlying ostensible retirement savings crisis in this country has far more to do with the incompatibility of the Asset Allocation strategy in the income for life phase, then it does with whether or not Americans are good savers. As a result, we embrace a profoundly different investment strategy we call Asset Optimization™.  

The concept of Asset Optimization is actually quite simple, yet extremely effective. By embracing all the tools available in the retirement planning toolbox, we are able to routinely deliver a significantly better outcome for retirees. 

We eliminate the inherent risks associated with generating income from a portfolio made up exclusively of capital market instruments. This approach substantially and quantitatively reduces the amount of capital one must commit to deliver the monthly income needed to complete a retirement income plan. In turn, this strategy frees up the remainder of the assets for more thorough planning and investing.  

Asset Optimization offers the ability to build less capital-intensive retirement income plans by pairing the economic advantages of optimizing Social Security with the much more cost-effective, guaranteed income solutions available in the open market. This unique approach focused on ALL retirement income assets routinely allows advisors to significantly reduce the amount of capital one must accumulate or commit in order to build a fully funded retirement income plan. 

Utilizing Asset Optimization as a retirement income/financial planning strategy provides our strategic partners with the opportunity to transition the intense burden of providing income for life onto two different completely leveraged and guaranteed third party platforms: Social Security and contractually guaranteed lifetime income solutions, like annuities. 

Andy Robertson,
Co-founder and Vice President, Training and Business Development
Founder & President of Capital Indemnity Group & Trusted Resource

As founder and President of Capital Indemnity Group and Trusted Resource, I work daily with some of the top retirement planning professionals around the country. Together, we introduce retiring Americans to the true power of one of the greatest retirement programs in existence today, Social Security. Understanding Social Security's unique ability to combat the erosive effects longevity, inflation, and taxes have on one's retirement capital is the key to building a fortified retirement income plan and minimizing the likelihood their clients will run out of money. With 92% of American households likely to fall short of their retirement savings needs, top retirement planners utilize our knowledge, training, and tools to embrace the complexity of Social Security planning and leverage its ability to salvage middle America's retirement dreams.