Mission Wealth Introduces Retirement Strategy Formula

Strategies for retirement planning can vary as greatly as the climates where financial advisers practice. The focus might be on accumulating a specific dollar amount, asset allocation or  a complex portfolio of diversified investments.Mission Wealth Management LLC, an advisory firm in Santa Barbara, California, aims to make planning for retirement easy with its “90/70/30 rule.” The goal, Mission says, is to help people realize how close they are to retirement.

“Our 90/70/30 rule makes cash flow, asset allocation, portfolio distribution levels, inflation and growth concepts much easier to understand,” said Brad Stark, principal and co-founder of Mission Wealth. “You can cut through the emotional roadblocks and focus on the most important items: What are your expenses, how much have you saved, and what does the investment world offer” to help you meet your goals.

“At the end of the day, people want to know, ‘Can we take that family vacation? Can I help my mom if her Alzheimer’s gets worse? Can I live my life?’” said Seth Streeter, president and co-founder of Mission Wealth.

Streeter and Stark devised the formula about 10 years ago. “The whole investment world is product-driven,” Stark said. “They’ve trained consumers to build portfolios and improperly buy investments based on past performance, only to find that the same returns won’t be duplicated. Picking investments in a rearview mirror doesn’t make you secure in retirement.”  

(Cont’d…)

Most strategies for retirement planning focus on return, not risk, according to Stark. That’s why the duo decided to turn their attention instead to people’s true cash needs.  “When most people head into retirement, bills come monthly [while] rates of return don’t necessarily remain consistent,” Stark noted. Retirees quickly discover they need consistent cash flow to meet fixed expenses.

The 90/70/30 rule is based on a formula to help determine an individual’s level of retirement readiness. The first step is assessing the income gap. Determine all expenses and all anticipated income sources, such as Social Security, rental property income, interest, dividends, pensions, among others. The most financially secure people heading into retirement have 90% or more of their expenses covered by anticipated income, Mission Wealth finds.

The next step, the 70/30 assessment, is determining the right proportion of income and growth investments in the individual’s portfolio, in line with their age and their health. Up to 70% of a portfolio should be in income investments with the remaining assets invested in growth to guard against inflation and longevity.

The longer an individual’s expected retirement, the higher the percentage of their portfolio should be invested in growth, and vice versa for shorter horizons.

(Cont’d…)

Mission Wealth’s rule helps clients focus on income that outpaces expenses and on an  investment portfolio that will tend to be conservative. “But it also makes them think about the future (i.e., inflation), and that taking some risks is important for growth,” Stark said.

The formula reveals only three possible outcomes, Stark pointed out: Investors who need to do a better job of saving more, investors who are nearly there, and the fortunate few who have more than enough put away.

People who don’t have enough set aside for retirement want a plan to meet their goals. Some will try to push the envelope on rates of returns, which was the downfall of many who retired too early in the late ‘90s, thinking that double-digit returns would continue forever. If they followed the 90/70/30 rule, Mission claims, they would have been far less aggressive with their nest egg or determined that they truly did not have enough.

Those who have just enough saved need to focus on expenses, especially during the first years of retirement, to make sure they do not invade principal. The lucky ones with excess savings tend to worry about whether they have enough. “From experience, savers are always savers,” Stark observed.

(Cont’d…)

The planning process brings clients and advisers into an open and honest dialogue, regardless of the investor’s age or income, Stark explained.

“After doing thousands of financial plans, we found that if someone passed the 90/70/30 rule, they were in a solid financial position,” Stark said.

“Understanding cash flow is more important than asset allocation or investment return,” Streeter added. “We wanted something that would be simple and would focus on levers they can control.”

Changes in Social Security payouts in the future, severe stock market dips and a rocky global economy may make Mission Wealth’s formula even more relevant to retirement planning. “If someone followed this rule over the past 10 years, it would have either told them they needed to work longer or it would have put an emphasis on bond implementation,” Stark said. “So this plan has worked well as bond prices have rallied.

“The challenge today resides in the low-yield environment. But our formula takes that into consideration,” Stark continued, “and makes the investor realize that they either need to continue to work and save more, modify their lifestyle or assume higher investment risks.”

“You could say we’re in the awareness business, first, and the behavior modification business, second,” Streeter said.