There are many theories and philosophies around retirement planning. Of course, as the economy and markets have changed, so have the theories and philosophies. But at the end of the day, they all work toward the same thing – a successful retirement.

To us, that means something different for everyone. With that in mind, we’ve developed a planning framework that aims to provide sustainable retirement income to achieve each client’s unique goals.

In our opinion, style boxes and other constructs of the investment industry (i.e., modern portfolio theory, 60/40 allocations, 4% withdrawal rule, post-modern portfolio theory, etc.) are essentially meaningless when it comes to current retirement planning. So, it may not be too surprising that Cornerstone’s approach is different from most of the retirement planning methodologies you may have seen in the past.

A More Modern Theory of Retirement

An economist named John Cochrane of the Hoover Institution at Stanford University delves into the retirement industry’s options in a detailed, quantitative way. Instead of the previous constructs, some of which we mentioned, Cochrane suggests investors focus on cash flows and goals-based planning.

It makes sense to focus on having enough money and achieving your goals, right? We think so. So, our approach, which is influenced by modern retirement theory creators Jason Branning and Ray Grubs, focuses on two foundational elements.

The first is cash flows. That means interest payments, dividends, or any other cash payments provided. Our philosophy, backed by Cochrane’s and other’s research, is that long-term investors should focus on payout streams rather than average periodic returns.

Also, a risk-free return should be quantified not as a series of Treasury yields, but as inflation indexed in perpetuity. The present value fluctuates significantly as interest rates change, but the cash flows relative to inflation do not, if modeled correctly. Therefore, long term investors should ignore price changes due to interest rates in retirement planning because the cash flows stay intact relative to inflation risk.

The second foundational piece is goals-based planning. It’s a way to focus solely on your needs and not comparative analysis to the neighbor next door. Goals-based planning theorizes that there's the average investor, and any deviation from the average needs to be justified by the differences between each individual investor need.

Investors’ needs can differ in many ways. Some include their human capital, risk aversion, time horizons, exposures to uninsurable risks, liquidity requirements, and differing beliefs. These differences require retirement planning to be a customized undertaking, in our opinion.

So, why adopt this philosophy?

Well, first let’s start with understanding that the historical strong returns on long-term bonds over the past several decades cannot be banked by assuming a historical average return in the future because we’re in a historically low interest rate environment. In other words, past performance is no guarantee of future results.

Therefore, it behooves distribution stage investors to focus on the underlying dividend and cash flow streams rather than historical returns. This creates a more predictable, forward-looking outlook. By focusing on cash flow and adjusting consumption for the riskiness of those streams, we're more likely to end up with a durable, successful plan.

Goals-based planning and a cash flow focus help when thinking about rare disasters, or as we call them Black Swans. These are situations when normal statistical relationships and portfolio models break down (e.g., an unexpected pandemic).

In our philosophical planning process, we prepare for these events and reinforce client plans with explicit stress tests. This gives us and clients confidence that both the cash flow plans and investments will hold up across a variety of market/economic conditions.

Our Roles as Advisors

We at CFS serve different roles to facilitate this type of planning. It’s a mix of skillsets, but ultimately, they all point toward creating a sustainable plan focused on specific needs.

For one, we help clients understand how they are different from average. This provides the basis for any future cash flow adjustments that may need to be made.

We also rigorously and comprehensively quantify consumption needs. This is an ongoing process and critical to establishing a durable plan.

A third role we fill is the explicit identification of risk buffers in income needs. Again, this is ongoing and something we consider vital to plan strength – we need to identify known risks to income and their potential impact.

Lastly, we provide clients with a more thorough active management plan. This means we concentrate on cash flow betas to support value/stability for short time horizons and a growth focus for long horizons. Put another way, we make sure the near-term is handled safely, while also keeping an eye towards growth over the longer term.

Your Personal Roadmap

This framework, which we call Roadmap 360, uses modern retirement theory principles from Cochrane, Branning, and Grubbs, along with our own planning and advisory services, to provide a more comprehensive retirement planning process that offers customized solutions for each individual retiree. Roadmap 360 represents a significant shift in focus away from merely the accumulation and growth of retirement assets. Rather, our process plans for the protection and use of assets in a tax sensitive manner in retirement during distribution years.

This is an important distinction because it creates individualized plans based on the uniqueness of the household situation, not upon rules of thumb such as “100 minus your age,” the “4% rule,” the “required minimum distribution rule,” and others.

We believe the Roadmap 360 approach underpins everything we do as fiduciaries when discussing a retirement plan. To understand it more, we want to explain its six major premises.

The first is that retirement planning is an absolute goal. That means the desired outcome of the process is to provide a guaranteed sustainable lifestyle.

Next, Roadmap 360 is highly individualized and specific to client goals. We focus on individual/household needs rather than on group statistics or historical data.

The third premise is that nobody knows the future. Thus, any comprehensive retirement plan must incorporate some type of contingency plan to address Black Swan events. This is where our stress testing of cash flows and investments comes into play.

Fourth, the plan must be secure, stable, and sustainable, focusing heavily on behavioral finance concepts. People fear they might run out of money during their retirement years, so we prioritize behavioral finance and client peace of mind (i.e.-“sleeping well at night”).

Premise number five is comprehensively quantitative – we place great importance on the household balance sheet and cash flow statement, looking out at least 10 years. This methodology provides a broad, dynamic view of the household’s needs, not just investable assets (which is where older planning methods focused).

Lastly, we use an extensive process to establish and document client priorities, needs, wants, and wishes at their current stage of life and match realistic cash flows to fund those before instituting the investment plan. As things change, so does the plan.

All in all, applying this approach at CFS helps us implement successful retirement programs that make sense to clients. Roadmap 360 plans are fully applicable to a client’s unique needs and focus on funding their lives and goals, which resonates. Roadmap 360 plans answer the “what ifs.” They provide flexibility for an uncertain future. And ultimately, the entire process helps deliver peace of mind and confidence in a successful retirement.