Practical analysis for investment professionals
15 January 2014

A New Rule for Retirement (Podcast)

As Jason S. Scott and coauthor John G. Watson considered the trillions of dollars that Baby Boomers had invested in IRAs and 401(k) plans, they realized that this generation had a looming problem: How could they turn their portfolios into retirement funds? “That was the big question we were looking at, and we thought it needed a better answer,” Scott says.

I got the chance to talk with Scott about his recent article, “The Floor-Leverage Rule for Retirement,” which was published in the September/October 2013 issue of the Financial Analysts Journal.

Scott and Watson felt that the traditional 4% rule was problematic for many investors. “If you followed that rule,” Scott says, “you faced bankruptcy and poor markets and missed out on good markets.” Instead, they sought to develop a new rule that was grounded in economic first principles, and thus was born the floor-leverage rule.

The floor-leverage rule is a strategy for retirees who can tolerate investment risk but insist on sustainable spending. Scott and Watson’s rule calls for purchasing a spending guarantee with 85% of wealth and investing the remaining 15% in equities with 3× leverage. Surprisingly, this leverage is a tool for managing risk.

“At first blush, I think our proposals really fly in the face of current practice,” Scott says. But he argues that leverage can be included in a portfolio “in a safe way that can give retirees a little bit of the best of both worlds.”

To hear Scott discuss the article and the practical implications of the floor-leverage rule, listen to the full interview above or download the MP3.

CFA Institute members can access the full journal article on the CFA Publications website.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Abby Farson Pratt

Abby Farson Pratt was an assistant editor at CFA Institute. Previously, she worked at the Denver Post and the University of North Carolina Press. Pratt earned the Claritas™ Investment Certificate and holds a BA in journalism and English from the University of North Carolina at Chapel Hill.

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