Executive Summary

What if I can show you how to add from 1.57% to 3% per year to your investment & retirement planning? Would that be worth the next 30 minutes of your life? 

Well, that’s EXACTLY what I’m going to show you today! And I’m not the one who came up with these percentages, they’re straight from industry mammoths Vanguard and Morningstar. So don’t take my word for it, take their words directly from them. 

And I’ll even share their research with you directly if you stick around until the end AND I’ve prepared a current list of the highest-rated funds in the core asset classes for you!

Why Should You Listen To Me?

So why should anyone listen to me? Well, my name is Greg Phelps and I’ve been a financial planner for 25 years. I’ve worked with two major investment banks (Morgan Stanley & Goldman Sachs) and the 4th largest accounting firm in the country RSM before founding my own firm in 2005 – Redrock Wealth Management.

I’m a CERTIFIED FINANCIAL PLANNER, A Chartered Life Underwriter, an Accredited Investment Fiduciary and an Accredited Asset Management Specialist.

In addition to all of that, my firm Redrock is one of only a couple hundred worldwide which are CEFEX certified. CEFEX is the Centre for Fiduciary Excellence and it is THE gold standard in the industry.

If you want more details just check out my bio with all of that boring stuff.

As I said I’ve been a financial planner for well over two decades. The one thing that has stuck with me is the fear and anxiety so many retirees and nearly retirees face. 

Can you imagine what retirement would be like without that worry? Without that fear and frustration? Can you imagine how much more you’d love and enjoy retirement with the confidence you’ve squeezed every dime from your finances? Because that’s my wish for you… that’s my passion!

I’m going to start by saying what we all think and know about typical “financial advisors”… they just don’t care! You know what I’m talking about. 

They want to sell you an insurance or investment product and move on to the next sucker! 

Or they throw you into some managed portfolio at some outrageous fee, tell you that you NEED a mortgage THEN sell you life insurance to pay your mortgage off all while laughing all the way to the bank. 

I’m here to tell you you’ve been DOING IT WRONG! And before I move on to the 12 tactics you must know to add 1.57% to 2.99% per year to your financial returns I want to be upfront… I am NOT applying for a job! 

I’m not selling you on why you should hire me. In fact, I take on very few clients per year and only under specific circumstances.

What I am trying to do is change the way you think about financial planning. 

You see, you’ve been a victim of the Wall Street marketing machine for decades! They’ve convinced you they have the “secret sauce” to generate returns better than the next guy! 

They’ve overlooked your planning needs and discounted your life goals. They’ve focused on their stock price and neglected what’s right for you! 

I left the brokerage world in 2005 for that very reason… I was sick and tired of being told what products to sell my clients and if I didn’t sell X number of people life insurance I wouldn’t get my bonus… or that trip to Hawaii, or that gold watch!

Those of you who’ve had a bad experience with a broker know exactly what I’m talking about!

You Can’t Add Alpha!

I also want to talk about the fact that you cannot add alpha! There really isn’t any way to consistently or reliably add “Alpha” to your investment portfolio. 

What I mean by “Alpha” is the manager added value. 

You probably thought I was going to teach you some investment trick where you could outsmart the markets and add percentage point returns to your bottom line. Unfortunately, it doesn’t exist.

There is no trick, no cheat, no way to outsmart the markets, for that reason we work with “smart beta” portfolios and buy the entire market rather than trade stocks, duck and dodge our way around bad markets, and try to beat the market returns. 

That’s another webinar in and of itself to explain to you why, but for today I’m just going to show you how to add Alpha to your overall financial and investment plan to the tune of that 1.57% to 3% I mentioned.

Let’s get started . . .

The Morningstar Study

I’m going to start by explaining where I get my data for this webinar. Has anyone ever heard of a company called Morningstar?

Well, real quick if you haven’t they’re a massive industry player! They provide a great deal of investment and financial analytics as well as manage over 200 billion (that’s billion with a B) in investment assets.

Suffice to say they’re highly reputable as well.

Morningstar did a study a few years back trying to determine the value a specific type of financial planning advice can bring to the table for investors like you.

In their research paper, the head of retirement research for Morningstar coined the term “Gamma” to quantify the additional value an investor could achieve by making better financial planning decisions.

They measured value through a certainty-equivalent utility-adjusted retirement income metric. Now, frankly, I can’t explain that metric but I can tell you they feel there are five fundamental planning decisions or techniques.

Morningstar assigns their 1.57% additional return to 5 factors in total, but they do not separate how much comes from which factor. You’ll need to take them all into consideration as they compound on each other.

This leads me to the first strategy and how to add that 1.57% to your bottom line!

1. Asset Allocation Based On A Total Wealth Framework

Asset allocation decisions are typically very subjective and highly focused on risk preference or risk tolerance. They ignore the use of risk capacity. 

Risk tolerance is the comfort level you have with portfolio fluctuations over time.

Risk capacity is how much risk—or volatility—you can experience without having to change your life.

I believe you should take this one step further and incorporate the risk requirement. Some retirees MUST take more risks to achieve all of their goals OR reduce their goals accordingly. This is a conversation that must be had!

The Morningstar study incorporates both risk tolerance and risk capacity to achieve the retirees’ optimal asset allocation, and they suggest the asset allocation decision should be based on “total wealth”, not just financial assets. Social Security and pension income must be considered in the process and since they’re income streams you can’t outlive, they function well as a safe “bond-like” allocation.

2. Dynamic Withdrawal Strategy

Most retirement income strategies focus on the initial retirement portfolio balance times a percentage—typically 4%—which is increased for inflation annually. 

The approach Morningstar used was to determine the annual withdrawal amount based on the likelihood of portfolio survivability. 

Retirement expenses aren’t flat each year after all. Some years you pay cash for a car which is a big “atypical” draw. Other years you may expect a large inflow such as selling a rental property or an inheritance which may reduce or eliminate your draw. You may travel from 65 to 75 then not travel again reducing your late in life retirement draws but increasing your early in retirement draws.

Retirement expenses can’t be based on a static percentage rate and must be based on an actual plan which incorporates a dynamic withdrawal strategy that considers market performance and expected investor longevity. These withdrawal rules should be reviewed annually.

3. Guaranteed Income Products AKA Annuities

61% of retirees from a 2011 Allianz study feared outliving their money more than dying! Annuities can hedge away longevity risk and can improve the overall efficiency of a retirement income strategy.

4. Tax-efficient Asset Allocation & Withdrawal Sourcing Decisions

Asset location decisions include putting less tax-efficient investments like bonds into pre-tax accounts, and more tax-efficient investments like stocks into taxable accounts. The Morningstar study combines asset LOcation with withdrawal sourcing, meaning where you draw your income from (pre-tax accounts, taxable accounts, tax-free accounts, etc.)

Drawing retirement income from the taxable portfolio first has a big impact on overall investment returns. I do however disagree that this is where the discussion ends.

Drawing retirement income from taxable, tax-free, and pre-tax accounts to minimize lifetime taxes must be reviewed annually to ensure your later in life RMD’s and pre-tax draws don’t throw you into a higher tax bracket. That being said, there is a general drag on your portfolio due to the taxes being paid earlier in life rather than later.

It’s worthy to note Morningstar did NOT include the use of the Roth IRA in their study but did note that incorporating asset LOcation strategies with a Roth IRA would have even greater benefits for the retiree.

5. Liability-Relative Optimization

Normal asset allocation is typically risk based only and ignores funding risks like inflation and currency valuations. By incorporating future liabilities into the asset allocation decision you can optimize your portfolio and hedge the risk of funding such expenses.

Asset-liability matching is a great concept to consider. It requires a set number of years liabilities to be invested into safer investments, and all other assets can then be diversified into more aggressive growth investments.

I did an interview with Dana Anspach on asset-liability matching which explains the concept and how to implement it.

Portfolios using this strategy may seem less efficient than normal asset allocated portfolios but are more efficient when achieving a sustainable retirement income.

The Results…

Using Monte Carlo simulation and a base scenario of a 20% stock and 80% bond allocation including a 4% withdrawal rate, Morningstar estimates a retiree can generate 22.6% MORE in certainty-equivalent income when compared to a 4% annual portfolio draw rate increased by inflation. This has the same impact on expected utility as an annual arithmetic return increase of 1.57%!

How would you like an extra 1.57% each year? I’m not saying you can surely get that, I’m saying by making smart financial and investment decisions you can absolutely boost your financial success as a retiree.

The Vanguard Study – Quantifying Advisor’s Alpha

Like Morningstar, Vanguard did a study on the same topic – how do you quantify the value a financial advisor brings to your situation?

If you haven’t heard of Vanguard, depending on who you believe and what time period you’re looking at, they’re one of the top three mutual fund companies in the size of assets managed. They were founded by John Bogle in 1975 as he pioneered ultra-low-cost index fund investing.

1. Asset Allocation

Asset allocation is the process of allocating percentages of a portfolio to various asset classes such as stocks, bonds, and cash. More in-depth asset allocation decisions are how much to allocate to large-cap stocks versus small-cap stocks, international stocks versus emerging market stocks, and such.

The Vanguard study states asset allocation is the single most important factor in determining an investors return variability and the long term performance of a broadly diversified portfolio.

For example, Vanguard compared a simple 60% stock and 40% bond index to small, medium, and large endowment average returns. These endowments typically have professional managers and access to investments the rest of us don’t have access to. 

The expectation is the professional manager should be able to beat the benchmark index when in reality the 60/40 portfolio handily beat the small and medium endowments and barely underperformed the large endowments.

The point being is asset allocation is important . . . far more important than security selection or market timing.

Asset allocation is defined in the investor’s “investment policy statement.” Every investor NEEDS an investment policy statement to reduce human error with market timing and security selection. 

If you don’t have an investment policy statement . . . get one!

While the value-added from proper asset allocation using broadly diversified investments is certainly positive, it’s impossible to quantify as every investor is unique. The value for one can be dynamically different than the value for another.

2. Cost-effective Implementation

By moving your portfolio into lower-cost fund options the value-added is .40% per the Vanguard Study.  They measure this by the asset-weighted expense ratio of the entire mutual fund and ETF industry. 

The average investor pays .37% for a bond portfolio and .54% for a stock portfolio. Low-cost investors pay .09% for bonds and .15% for stocks. 

It’s simple enough. Pay less and keep more. 

Do you know what you’re paying for your investment portfolio?

3. Rebalancing

This is a big value add for most every investor with the Vanguard study stating a .35% bump using a 60% stock and 40% bond allocation with annual rebalancing over no rebalancing.

We’ve already discussed how important the asset allocation decision is. If the allocation decision is so important then the rebalancing decision is equally as important so as to maintain the original allocation.

Rebalancing is the process of:

  1. Selling investments which have appreciated above their target percentage by a margin, 
  2. Bringing it back into tolerance from the initial targets, and 
  3. Using the proceeds to buy investments which have depreciated under their target allocation by a margin.

Typically rebalancing frequency is annually. I don’t believe annually cuts it.

What if the stock market starts at 1,000 on January 1st, appreciates to 1,500 mid-year while bonds drop from 1,000 to 800, then both asset classes return to their starting point by December 31st? You’ve missed your chance to harvest gains and buy bonds cheap!

Rather, I believe monitoring a portfolio monthly for the opportunities makes much more sense. It’s a more pro-active approach to keeping your asset allocation in line with your retirement planning objectives.

WARNING: Rebalancing can actually cost you returns, however. Typically, rebalancing means selling stocks as they appreciate to buy bonds for example. Since stocks have higher long term expected returns, your overall long term returns will likely be lower with rebalancing.

While rebalancing may reduce your long term returns slightly, it’s an excellent way to control risk. Imagine if you never rebalanced your 50% stock 50% bond portfolio? 

In 10 years your portfolio could easily be 75% stock and 25% bond. Did you intend on carrying that much risk into retirement? Probably not.

So rebalancing is great at controlling and maintaining risk exposure over time. While your investment returns may be slightly lower, your overall risk is substantially lower by rebalancing regularly.

In the study, Vanguard illustrated that over the 45 year period from 1969 to 2015 a 60/40 portfolio with NO rebalancing exhibited the same risk as an 80/20 portfolio which was rebalanced.

If you’re going to take the risk of an aggressive 80/20 portfolio with your 60/40 allocation, you might as well get the higher returns and just get an 80/20 portfolio and have someone rebalance it for you!

Again, Vanguard puts a .35% valuation on this tactic.

4. Behavioral Coaching

Vanguard states that behavioral coaching can add 1% to 2% in net return. This is a HUGE value add!

What is behavioral coaching? Let’s talk about the Dalbar study.

Dalbar is a company that studies investor behavior every year. They put out a report that shows how the average investor fares versus a simple benchmark index like the S&P 500.

For example, the Dalbar “Quantitative Analysis of Investor Behavior” study done in 2019 (for 2018) shows that the S&P 500 index outperformed the average stock investor by 5.04% (S&P 500 was -4.38% and the average stock investor was -9.42%).

I realize that’s just one year . . . Let’s look at some longer timeframes.

As you can see, even over long periods of time the average equity fund investor has an abysmal track record of beating the simple index benchmark!

For the 10 and 20 year periods, the average equity fund investor underperformed the S&P 500 by 3.46% and 1.74% respectively.

For the 10 and 20 year periods, the average fixed-income fund investor underperformed the Barclay’s Aggregate Bond Index by 2.78% and 4.33% respectively.

I can go on and on about how poorly we’re wired to be successful investors, in fact, I dedicated a whole chapter in my book on this concept. But for now, you get the point. 

Why can’t the average stock and bond investor beat—or at least come close—to the index benchmark? Because the average investor buys and sells at the wrong time based on either fear or greed. It’s that simple.

For this reason, behavioral coaching has tremendous value to the average investor. Now I’ve been helping people plan their finances for well over two decades and I know what you’re thinking . . . “But I’m smarter than that, I don’t get fearful or greedy, I don’t buy when things are high or sell when things are low, so there’s no value in this for me.”

A VERY SMALL PERCENTAGE of people can disassociate their emotions from their investments. The overwhelming majority of investors—especially retired investors because they can’t earn it again—do the wrong thing at the wrong time costing them tremendous financial hardship when they need it least . . . in retirement!

Vanguard goes on to validate their 1% to 2% in advisor alpha by studying the performance of 58,168 self-directed IRA’s and comparing them to simple target-date funds based on age. They found that if the investor never looked at their IRA they trailed the benchmark by .19% which is to be expected due to fees.

If however, they had even one transaction they trailed the benchmark by 1.5%!

Doing a deeper dive into different types of stock investors, these behavioral mistakes show that at best the individual investor trailed by .86% and at worst they trailed by 2.28%. Behavioral coaching is clearly a strong value add for those in retirement!

So while you may think “that’s not me, I don’t make rash investment decisions” the reality is you likely do! And making those poor emotional decisions—based on fear and greed—can cost you a massive amount of money over your lifetime!

5. Asset LOcation

Here’s where Morningstar and Vanguard clearly agree! Just as the Morningstar study indicates, where you LOCATE your investment assets between various types of taxable, pre-tax, and tax-free accounts has a big impact on your overall bottom line.

While Morningstar tried to quantify the value-added of their five tactics in one percentage (1.57%), Vanguard quantifies their 7 tactics separately with asset LOcation adding from 0% to .75%. 

They note the percentage value added depends on the individual investor’s overall asset allocation and the size of each type of account.

The biggest benefit to the investor (closer to the .75%) comes when:

  1. The various types of accounts (taxable, tax-free, and pre-tax) are close to equal in size, and 
  2. The investor’s asset allocation is relatively balanced (50% stock and 50% bond), and
  3. Additionally, the higher the tax bracket the investor is in the more benefit they’ll realize.

Conversely, for an all stock or all bond investor with only one type of account the value is 0% because there’s no asset LOcation that can be incorporated into their investment plan.

Note: The Vanguard study doesn’t specifically reference tax-free accounts such as the Roth IRA. I added that into the discussion as I’m positive it has a big impact in addition to the pre-tax and taxable accounts.

The best part of the asset LOcation strategy is it doesn’t increase your investment risk one bit! Additionally, the value-added compounds over time! 

Keep in mind actively managed funds are not as tax-efficient, and in some cases make this strategy worth less OR may actually make the target LOcation inverse from the tactics noted in the Vanguard study.

6. Withdrawal Order For Client Spending From Portfolios

Again, similar to Morningstar’s “withdrawal sourcing”, Vanguard believes where you draw your retirement income from has a massive impact—up to 1.1%—on an investor’s return.

This depends on the size of each type of account. The more evenly sized they are between taxable, pre-tax, and the tax-free Roth, the more you can manage the tax implications of the investor’s withdrawals.

Further, the investor’s tax bracket has a big impact on the value-added here as well. Investors in higher tax brackets will realize a much bigger value-added.

You can minimize the tax drag on your net investment returns by ordering your withdrawals in the following manner (according to Vanguard):

  1. Required Minimum Distributions from IRA’s
  2. Cash flows (dividend and interest distributions) from taxable accounts
  3. Taxable assets
  4. Tax-preferenced assets
    1. If you expect a higher tax bracket in the future, draw from pre-tax IRA’s first then tax-free Roth accounts
    2. If you expect a lower tax bracket in the future, draw from tax-free Roth accounts first then pre-tax IRA’s

The Vanguard study stops there with generally accepted conventional wisdom. You can take this a step further however and really supercharge the value-added from withdrawal sourcing.

Tax minimization by carefully structuring your withdrawals are important, but planning your overall tax strategy is more important!

Consider doing Roth conversions from your pre-tax accounts as a piggyback onto this strategy. Roth conversions up to certain tax brackets (and Medicare cost bump limits for those on Medicare in retirement) can substantially reduce your overall lifetime taxes.

7. Total Return Versus Income Investing

Most retirement investors have the overwhelming desire to seek income-producing investments rather than invest for total return. This is a huge mistake!

A total return approach focuses on both income AND capital appreciation. The big difference is with a total return approach you’ll have less risk and better tax efficiency.

All investments have risk, and higher-yielding investments have a commensurately higher risk. For example, many retirees:

  • Overweight long term bonds for increased yields – This creates a greater risk of interest rate sensitivity if interest rates rise.
  • Overweight high yield bonds – This creates a greater risk of default due to lower credit quality from the issuer and a higher portfolio volatility.
  • Overweight higher-yielding stocks – Chasing a higher dividend to increase retirement income can easily lead to lack of diversification and higher overall volatility.

Keep in mind the marginal tax rate for a married couple with $100,000 of income is 24%. The equivalent capital gains tax rate is 15%. Therefore, the more retirement income you can generate from capital gains—rather than non-qualified dividends and interest—the better!

Let me ask you a question?

I just explained how two well-respected industry behemoths say you can add from 1.57% to about 3% depending on your unique situation. How would you like to have that extra few percent each year added to your bottom line?

I think we all would! But there’s a catch . . .

To be successful at retirement and investment planning you must have 3 things: time, knowledge, and desire. 

First you must have the time to create, monitor, manage, adjust, and tweak your portfolio. Sure it can be as simple as clicking some buttons on your brokerage website, but regardless it takes time and consistency.

Next, you need the knowledge (which also requires time). Are you keeping up to date on tax law, retirement planning, investing, and so on? Sure you can read a few good books and that helps, but the best professional advisors are constantly honing their skills through educational conferences, research, and credentialing.

Finally, you need the desire to manage your investment and retirement plan. This is perhaps the easiest of the three things you need, because plenty of people “want” to manage their plan and portfolio, but very few have the time and knowledge to do so.

Do you have those three things? 

What would an extra 1% or 2% per year mean to your retirement? What would it mean to your legacy?

Discounting taxes and inflation, at 5% per year a million-dollar portfolio can last you from age 65 to age 92 living on 65K a year:

At 6% per year it can last you to age 100:

At 7% per year you can leave that same million dollars to your kids as your legacy: 

How would that change your life? 

Would you travel more? 

Maybe buy the Mercedes instead of the Toyota?

Join the country club instead of playing the muni courses?

And best of all what if it didn’t cost anything?

Let’s assume for the sake of argument a professional advisor would charge you 1% to manage your million dollars. Based on the Morningstar and Vanguard studies that still leaves you with an added .57% to 2% AFTER their fee!

So how much does a financial advisor cost anyway?

The answer is it depends. There are many types of financial advisors and most of them aren’t remotely capable or interested in doing the things discussed in these studies.

But . . . If you found the right financial advisor—the best financial advisor for your situation—and they merely covered their costs by implementing these strategies and tactics would it be worth it? Would that provide you peace of mind?

Only you can answer that question, but for me, I pay professionals to do professional work. If they can cover their costs and/or add value above and beyond that’s all the better!

I learned this the hard way. Years ago at my old house I wanted to install a water softener. I figured I could do it myself – no biggie right? A little bit of soldering and viola!

So I got the torch and the solder. It took me quite a while, but I did it! I soldered plumbing to the new water softener.

It worked FANTASTIC for a couple of years. It was the UGLIEST sweat soldering job you could ever imagine, but it worked great! 

Until . . . That one day when I came home and the garage was FLOODED! While my soldering job was ugly it was equally as weak apparently.

And to think I could have to spend a hundred bucks to have a professional do it, but no, I had to flood the garage to learn my lesson.

So, I pay professionals to do their job now. My wife is much happier that way 🙂

What We do

Everything discussed in these reports we do for our clients daily. We work with retirees and those nearly retired on their:

  • Investment allocation, LOcation, monitoring, rebalancing & management
  • Overall retirement life planning
  • Social Security maximization
  • Retirement income planning
  • Tax minimization & planning
  • We provide concierge services like lost money finder, homestead validation, and notary

And we hold ourselves accountable to YOU!

We give our clients a personalized report card annually which shows them how often we met, what we reviewed, how many tax planning engagements we had, how often we reached out to them, how many educational events we held, and a lot more!

We don’t just say we’re going to do it, we prove it with our Client Report Card!

We do this for clients with portfolios from 1 to 5 million. We also work with other clients on an hourly basis or project planning basis.

What Grade Would You Give Your Financial Advisor?

Do they grade themselves with a customized Client Report Card? How would you grade them? Gut feeling?

I realize investment performance is one way to grade a financial advisors worth, but like I said financial advisor alpha is zero when you talk about investments.

If investment alpha is zero, how else would you grade them?

Are they adding value like discussed in the Morningstar and Vanguard reports? Are you confident you’re realizing that 1.57% to 3% each year for the fees you’re paying?

That begs the question “Do you even know what fees you’re paying?”

Real advisor alpha comes from tax planning, life planning, and generally helping you retire and live the life you’ve dreamed of!

Summary

These two studies are widely available online. You can Google them pretty easily, but if you’d like I’ll send you the links to them directly ALONG WITH our current report on the core asset class funds you should be looking at.

I realize this is some pretty detailed stuff and we covered a lot of it. Allocation, LOcation, withdrawal sourcing, and general retirement income strategy. The point is you can indeed boost your returns by using these strategies!

There’s a lot more to the story, however! Only 4% of people maximize their Social Security benefits! Most people don’t understand Roth conversions and don’t know how to incorporate them into their retirement plan. And without highly sophisticated software most people will never live the retirement of their dreams because they’ll be worried about dying broke!

When you’re ready to say goodbye to that worry, frustration, and anxiety and hello to a memorable and purposeful retirement with maximum money confidence . . . give us a call! We can help you retire with confidence!