Investment: Retirement - Perpetual Retirement Plan



It is not logical to arrange a retirement program to last for 30 years even though the likelihood of a duration of that length, or even longer may be real. A more simple approach is to try to take time in specific bites, five, seven, maybe ten years at a whack. This allows an income stream to be set up while also planning for the future.

A Perpetual Retirement Program (PRP) is a plan which is self perpetuating - almost. This type of program requires an allocation of a certain amount of money for the purpose of providing income, while the remaining amount should be positioned for growth. Since it is designed for retirees, it is critical that it begin with income. This method is very conservative and is my preferred formula for allocating retirement assets.

This approach is based on mathematics. It is not possible to guarantee any return. It is not possible to accurately predict rates of inflation. We have seen many changes in economic climates throughout the years affecting relationships between purchasing power and earnings. The PRP is designed to cover income needs under many varying economic circumstances.

The following is a generic example. We use mutual funds here, but if your preference is for individual stocks and bonds, the concept is the same. Your specific income requirements will be determined for you based on your income needs.



First we need to do some math. What is coming in and what is going out? Then decide how much additional income is wanted or needed on a monthly basis. This can most accurately be done by preparing a budget. Sometimes it is not necessary. Whatever shortfall pension and social security income does not provide must come from another source. The derivation is the PRP income investment.

For example: You have certain guaranteed income, Social security income of $2,000, a retirement pension of $2,500, and a rental house that nets $500 per month (rental income is never guaranteed, but it is pretty consistent for you). That total income is $5,000 per month. Your expenses are about $6,000, so you are short about $1,000.

Lets assume that after all expenses have been calculated, and income has been accounted, there is a shortage of $1,000 per month (your need may be more but $1,000 is used in the explanation because it is a nice round number). There is money available, but how to handle the income need in order to maintain the accustomed standard of living can be confusing.

Inflation must be considered. After all, $1,000 today buys much less than it did ten years ago, and it can be reasonably assumed that it buys more than it will ten years from now. How can we make a guess at inflation?

How much will the investments earn? We know how much they earned in the past but we have no crystal ball. Can we accurately project our future earnings? No.

There are many calculations to try to determine how much money should be placed into a source for immediate and near future income needs. Inflation rates can be guessed, hardly scientific. Estimated investment returns are important, but unreliable. I prefer simpler methods.


RULE OF 110 / 9 (months/ years)

Regardless of the inflation rate, there is a number which when multiplied by the monthly income need will determine a sum that will almost certainly last for approximately ten years. Because inflation rates and earnings on investment are so intertwined, this is a very accurate method. If inflation proceeds at a rapid pace for ten years, say at 9 percent per year average (we have never been that high for so long) we would expect our earnings to be closer to 12%. If on the other hand, inflation rate is slow and averages only about three percent, we might expect our earnings to be four or five percent.

If we knew what inflation would bring, and we knew what our investment earnings would generate, this would be easy. We could agree that we should calculate exactly what we need for income to last the recommended ten-year period. There would be no need for projections, since we somehow could forecast these events with certainty.

Although I prefer a ten-year period, a five, or a seven-year incremental period may be used, but because of the shorter term, it is of slightly greater risk.

We don’t know what will happen, or when. We don’t know what inflation will be and therefore do not know how much money we will need in five years, we have to make an educated guess based on history. The same is true for investment earnings. Since we must guess anyway, why not make it easy. Multiply the monthly income need by 110, and deposit it into an income generating account. This amount will last for 120 months give or take a few under nearly all inflation and earnings scenarios seen in modern times.

This factor of 110 months or 9 years was not taken arbitrarily, it didn’t come to me in some divinely inspired dream. It is a number that is consistently accurate over varying economic conditions for 10-year periods. If we don’t or can’t anticipate ten years, your number might be less, this is just an example. For 7 years it is about 82. 5 years roughly 60. I know - it calculates to very nearly 12 multiplied by the number of years and decreases as duration increases. Simple, yet it works.

If inflation is higher than normal, earnings will be higher because this money was placed into inflation sensitive investments such as short-term bonds or bond funds, or short- term treasury securities. This money will be drawn upon regularly and does not belong in sector funds or funds likely to be affected by the volatility of equity (stock) markets.

Lets assume we do the math and we use three percent as an inflation rate we except to endure. This projects to about a five percent return we should expect form our investments. We need $1,000 per month supplemental pension, so we multiply by 110 and have $110,000. If we place $110,000 into a secure income oriented investment, it should last very close to 10 years. In year seven, inflation will force our monthly need to about $1,200, so we withdraw it. By the end of the term, we have a need of around $1,350 per month. After 120 months, continually adjusting for inflation along the way, we will have a little over $2,500 remaining, or about a month and a half left over from the income account.

Let’s use different numbers. Assume that we expect inflation to be nine percent. That means we will anticipate a return of 11%, maybe a little more. Using the same variables for comparison, we will need just over $1,700 per month to start the seventh year due to the ravages of higher inflation. By the end of the ten-year term, we will need almost $2,500 per month, again adjusting withdrawals monthly. After the 120th withdrawal, there will be about $6,100 left in the account, or a little more than two monthly withdrawals. Why worry about calculations? Multiply the monthly need by 110 and start there.



If the return on investment only equals that of inflation, the income stream will run out in about nine years. The perpetual plan is arranged so that there is extra time. Time is a major risk in any investment plan, we want to limit that risk as much as reasonable.

Inflation will eventually force increased withdrawals, but it should not be adjusted monthly. After a year (or a few), the initial withdrawal amount may no longer be sufficient, so the need becomes greater. We use a plan spreadsheet will project monthly increases only to illustrate the effects of inflation, not to suggest annoying, tedious regular monthly adjustments.



If the investment selection is expected to perform better, it is possible that only 100 times monthly earnings may be necessary, but be careful. Remember that the major risk is time. The hope naturally is that the investments will earn a greater return. To plan that they must is dangerous.



While the income stream from the income portion of the perpetual retirement plan is in place, other assets should be placed for growth. These moneys may be placed in mutual funds, tax deferred annuities or even into well selected stocks or personal real estate. The idea is to begin the next ten-year program as soon as possible. In other words, we don’t just sit and wait for 10 years and then start again. If we have an opportunity to begin another ten-year plan after only four years, by all means we should go for it. If the growth portfolio performs particularly well in a short period of time consider locking in for another ten years. Grab some of the gain and begin another income program. Keep in mind that the retirement goal is income. Some assets are placed for inncome now, some for later. 



There can be many phases to the perpetual retirement program. We will consider any subsequent repositioning of assets to extend the guarantee of income period to be phase number two. If it is the ninth time we reallocate from growth to extend income flow, it will still be considered the second phase. Simply stated, there are only two phases. First is original allocation, identifying income and growth portfolio sections, the second is replenishing the income source, which hopefully will occur every few years.

All phase twos are calculated the same way as the first allocation. Simply take the income requirement at whatever it is at the new time line and begin again. The income source remains relatively constant. This money is not as actively managed, but rather set it in place for a while. Sometimes it may be selectively moved for example from short-term bonds to long when interest rates are falling. Care should be taken because if interest rates rise, the long bonds will be at greater risk.



The growth portion is whatever money is left after the need for income and cash reserves are satisfied. This money is managed differently. Tax favored investments may be appropriate if the tax bracket is higher.

A tax deferred variable or fixed annuity may be just the thing - (But NOT in a qualified retirement plan - see below). This investment allows the growth potential of the stock markets (variable) to be placed while avoiding current taxation on the earnings and capital gain distributions. Moreover, if the time is right to move from one equity account to another, tax erosion will not deplete the account as taxes are paid only when funds are withdrawn, not when they are transferred. Don’t forget, there are now many true no-load annuities available to us without losing 5 or more percent of your assets to a salesman.

An annuity is “fixed” when the volatility is removed and the return is steady. It may earn 3% or sometimes less, or maybe 9% and sometimes even more when interest rates are high, but it will not suffer losses during stock market declines. This is true because it is invested in guaranteed interest bearing accounts such as government and corporate bonds and bank certificates.

If most of your assets are already in tax deferred retirement plans, do not use the annuity. It is already tax deferred so there is no benefit to tax defer it again. There is no such thing as “double tax deferral”. The same can be accomplished through your plan without the added wrapper of the annuity.

Holding tax deferred annuities within an already tax deferred retirement plans is a fundamental error in investment placement planning. We place assets where they can generate the greatest benefit. For example a highly taxable High Yield Bond fund performs best when in a tax deferred plan so that it will avoid taxation. We don’t put a tax exempt municipal bond into retirement plan as they will not benefit from the placement. Just as the tax-deferred annuity can’t be more tax deferred, a tax exempt bond can’t be more exempt from tax.

A few well selected preferably index finds will work well. Maybe a large international index combined with an S&P index fund and precious metals, real estate, small cap, and a few choices you like in sectors you think may be out of favor at the moment such as Utilities, High Tech, or maybe communications, or even major foreign players like Japan, China or Europe in general.

Try not to be too active. To quote from my first book Financial Survival 101: “An investment portfolio is like a pile of horse dung, the more you touch it the more it stinks”. Move money only when there appears to be an obvious opportunity - even then it could be the wrong time. Consider repositioning only if the gains have been more than satisfactory and / or other opportunities appear to be significantly better elsewhere.



Although fragmentation should be avoided, we may want a slightly more diversification when utilizing the perpetual retirement program. There is often little advantage in acquiring 20 mutual funds rather 1/4 or half that. One advantage though is that more opportunities are likely to exist in which a fund may have greatly appreciated in a short period of time. Although the selection of 20 funds might be considered to be overkill for many, an extra three or four funds in unfavorable sectors may be appropriate for a portion the growth portfolio.

If one of the sector funds selected rises very fast, that money will be able to be placed to add a few more years of income. If the guesses are wrong the sector funds could languish for years. If this happens a good overall long-term position should still be maintained from the other more diverse funds.

The greater the diversification, the greater chance that there will be a profitable investment at any single moment in time. Keep in mind that a point is reached when the long-term safety is no longer enhanced by this scattering and fragmenting of assets. Fragmentation occurs when one mutual fund really just duplicates portions of other funds in the portfolio. We try to avoid that, but some fragmentation will undoubtedly occur.

The suggestion is not just to increase the number of funds, but also to choose sector funds with profit potential through timing. This is not critical to the success of the PRP. Four or five mutual funds will be plenty if it seems to be too much of a bother to do a little timing with sector funds. A combination of domestic, international, global, foreign (well diversified in terms of countries), precious metals and natural resources is really all that is needed. This combination will provide opportunities when some funds are increasing while others are on the decline. With the exception of the precious metals and natural resources funds (if included) extreme volatility shouldn’t be a problem. The overall portfolio should perform relatively steadily, while individual sectors temporarily outperform, others could very well under-perform.

Steady performance means that a typical market return is expected, about seven, eight or nine percent per year. This may come as a 20% increase one year and a ten percent drop the next. One fund may be rising while another is falling. When one fund has risen consistently for a period of two or more years to an extreme level, it may be time to reposition all or part of it for income. The idea is to help try to guarantee the next few years of income sooner rather than later.



Suppose there is a pension that is scheduled to automatically adjust to inflation. This is a COLA. COLA means “Cost of living adjustment”. How is this calculated into the program? - It isn’t unless absolutely necessary. At the beginning of the retirement period the shortfall is determined. Assume that pension will not keep pace with inflation, even if it is believed that it probably will. This will allow another safety feature. If it does keep up with inflation, great, less money will be withdrawn. If it doesn’t, the plan will not be disturbed, it has allowed for that eventuality as more income can be had because the time frame is long.

It is possible that the COLA adjusted pension will conscientiously and accurately increase annual income based on the consumer price index. The CPI is a certain assortment of goods and services which the government changes from time to time. If only those items are bought, it should be fine. If the buying habit includes purchasing other things that may experience greater inflationary pressure, the PRP will be in position to provide the income you need. It is likely that purchasing habits will closely resemble the patterns of those items selected for the CPI, but they may not.



The idea behind the development of the Perpetual Retirement Program is simple: Arrange for income, protect it with enough time and invest the remainder for growth, which will later also be converted to income. Given enough assets, most investors with conservative temperaments should be able to implement a PRP with little trepidation for a long and happy retirement.

The investments should be monitored to ensure that they are performing within acceptable limits. They should not be altered on a whim, but reposition as policy dictates.


(Note: This plan is the property of Christopher M. Barra, of Barra Tax Service. It is requested thay my readers utilize it personally to help gude and assist in developing their own portfolios. Please do not share this idea with any mindless financial salesmen who haven’t had an original thought in their heads since the Spanish Inquisition.)