Research Articles

Structured Financial Planning

The following is an abstract. Please contact me to request a copy of the full article.

Financial planning is a process whereby one attempts to determine how their assets will cover their liabilities (e.g., retirement). There are many interrelated moving parts within the financial planning process, so we first identify three primary components: assets, liabilities, and the investments linking them together. We believe this decomposition facilitates a better understanding of the overall process and provides a better perspective for our discussion and evaluation of related products, strategies, and concepts.

We discuss two relatively popular products and strategies for retirement planning: annuities and the safe withdrawal rate (SWR) portfolio approach. We then present our own strategy which is effectively a hybrid approach: structured investment income (SII). We highlight the specific benefits of each of the three strategies and weigh them against potential costs and risks. We also include several non-mainstream but important concepts related to planning and retirement.

Our SII approach attempts to extract the primary advantages of annuity and SWR strategies while addressing two of their major drawbacks: costs and market dependency. We effectively isolate the key benefit of annuities (longevity insurance) without paying for extra bells and whistles. We then complement the annuity income stream with dividends from a portfolio of (preferably high quality) stocks to directly target the desired retirement income stream.

Relying on the dividends but not the principal removes market dependency and allows the investment capital to grow unfettered in the background. Relative to the more complicated annuity products and statistical SWR approaches, we believe SII provides a simple and transparent alternative for those formulating their financial planning or retirement strategies.