First, a shout-out to friends and fans who wished my mum a speedy recovery. Yes, she is well on the road to getting better. As for me, I've settled into a routine at the hospital, which has allowed me to read and blog more.
Today, I will talk about this peculiar book called The Guru Gap by David Mcknight, which discusses fairly technical personal finance topics for US readers and compares the central ideas the different gurus have.
One interesting discussion is an exciting take on the safe withdrawal rate that had been discussed to death in local forums. Apparently, many professional advisors in the US are quite cheesed with Dave Ramsey for suggesting an 8% SWR instead of a 4% one, even though the 4% has been backtested and Monte Carlo simulated to death.
Strangely, the book has succeeded in a reasonably robust defence of the 8% SWR, which may drive Investment Moats into apoplexy.
The idea is that Dave Ramsey, a popular finance guru in the US, is very aware of the limitations of spending 8% of a person's portfolio every year. At best, the odds of surviving 30 years of expenditure without work are slim. Still, from the US context, it was argued that if you tell an average person that he can only spend 4% of his savings every year, he will be so discouraged that he will not even bother to do anything about financial planning in the first place. So, the viability of the 8% withdrawal rule is a workable lie for folks to get started and shift to a lower withdrawal rate once savings hit a critical point.
Beyond this argument, the book's value shines out when the discussion begins about how an 8% withdrawal portfolio can actually function. This is, sadly, not totally within a credible discussion in Singapore. However, a commissioned financial advisor with some brains might consider reading this book and shoe-horning it into the local context.
The first obvious idea is to employ an annuity to gain lifetime payouts. Annuities bought from the private sector may not pay for life and can be expensive. Instead, we are luckier than Americans because we have CPF-Life. Locally, if we have CPF-Life at the ERS level, spending down 8% of our portfolio is credible as CPF-Life at 4xBRS can generate more income than a 65-year-old needs to have a basic standard of living.
The second idea (which I do not understand well) is that the book also recommends having a volatility shield to spend down on recession to complement an 8% SWR portfolio. If you have a volatility shield with 8 years of living expenses, you can spend 8% with high odds of surviving the next 30 years. But what is interesting about the author's recommendation to invest in the shield is that it will give a warm fuzzy feeling to the commissioned-based FAs who read my blog.
The proposed approach will enrich an FA because it should be invested in an Indexed Universal Life product. The claim is that, after fees, such an instrument can still grow by 5-7%. I leave further discussions to the MDRT and CFP people who read this, but I was not pleased to know that buying an IUL is basically buying an ILP + Whole Life policy.
While the ideas in this book are a treasure trove of ideas that can be adapted to the local context, there isn't a need to deviate from the wisdom of local investors.
- We use CPF-Life to generate a bare-bones existence even at the FRS level. About $1,100 in today's dollars under the standard plan.
- We use a dividends portfolio and an SWR equal to the current yield to cover the shortfall, which is about $400-$600 monthly compared to CPF-Life.
- Our residential home is a source of capital gains and room rentals, covering our bequest motive.
- Our kids, if raised correctly, are annuities of last resort.
Sometimes, conventional ideas are great!
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