Parting Shot continued from page 64
between growth and safety in asset allocation planning. The second issue was inflation sequence risk( as opposed to investment sequence risk), in which inflation runs higher than average in the first decade, say 4 %, then drops slightly to 3 % for the second decade, hits the Fed target rate of 2 % for the third decade and then drops to 1 % in the fourth decade.
“ High inflation in the early retirement years erodes purchasing power more rapidly, forcing larger withdrawals from the retirement portfolio,” Capizzi writes in his white paper.“ These increased withdrawals, in turn, leave less capital to grow and compound over the remaining retirement years, even when inflation moderates later.”
“ Separating immediate needs and income distribution from long-term goals like emergencies, healthcare, and legacy allows for more appropriate risk allocation in each portfolio,” Capizzi writes in the paper.“ By segregating assets into distinct portfolios with specific purposes, this approach naturally reduces the temptation to make sweeping changes based on short-term market fluctuations. Each portfolio maintains its focus regardless of current market conditions.”
When it comes to investing, Capizzi says it’ s important to remember that advisors should not be trying to pick the top or bottom of the market. Instead, they should try to shift their volatility: When the market is higher, mistakes are more costly, and prudent, conservative behavior is more warranted. The time to take more risks is when the market is at the bottom.
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“ Separating immediate needs and income distribution from long-term goals like emergencies, healthcare, and legacy allows for more appropriate risk allocation in each portfolio.”
— Sal Capizzi
Capizzi’ s analysis suggests that if client portfolios are going to last, they will need to generate returns of 4 % to 5 % above inflation— which he calls the necessary“ real return” in retirement.“ So all of a sudden the dynamics change drastically when you’ re doing your planning,” he says.
Another strategy is what he calls“ purpose-oriented portfolios,” which replace the traditional asset allocation buckets. Instead of siloing assets by when the client is expected to tap them, advisors in this case divide assets into four separate portfolios— a distribution portfolio( which includes the income paycheck), a healthcare portfolio, a flex portfolio( for surprises or special events) and a legacy portfolio( something to leave behind for family).
“ Where we want the volatility is at the bottom, because as long as markets move in cycles, then eventually you want to buy more of the equities at the bottom of the market, and now your recovery time is quicker,” he says.
Capizzi is still haunted by the idea of a 70-year-old client with a 100-year-old parent, a 130-year-old grandparent and no inheritance.“ If this is a normal person, she’ s only accumulated normal wealth. Pretty much just for herself,” he says.
“ If you’ ve got adult kids and you can’ t afford them living with you, it’ s not easy but you can kick them out. You can’ t kick out a 130-year-old grandparent. I mean, you can, but the road is going to be littered, littered with carcasses.”
62 | FINANCIAL ADVISOR MAGAZINE | APRIL 2025 WWW. FA-MAG. COM