Taking Aim at Sacred Cows

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Conventional wisdom is just that, conventional. It might serve as a quick guide to making decisions, but it won't necessarily unearth new insights into a problem. That's how Ty Bernicke of Bernicke & Associates of Eau Claire, Wis., thinks about financial planning.

From the beginning of his career, Bernicke has taken on such topics as the optimal withdrawal rates for early retirement, the soundness of rebalancing, and whether or not to use annuities. And he has made a point of broadcasting these views in industry publications in which his peers have felt free to push back on his unconventional conclusions.

"When I first got into the business, I was very young," says the 34-year-old Bernicke, who joined his father's firm straight out of college in 1996. "I needed to establish my credibility and knowledge base, so I began to publish."

Spending Less in Retirement
Bernicke caused a stir in 2005 with an article in the Journal of Financial Planning challenging the accepted wisdom of the 4% withdrawal rate in retirement. The accepted wisdom has been that a retiree can withdraw 4% a year in the first year of retirement and adjust upward each year thereafter to account for inflation. Following this methodology, the acceptable wisdom says, the retiree has a reasonable chance of not depleting his or her portfolio.

But Bernicke made a case for raising the initial withdrawal because he observed that his clients actually spend less--not more-- as they age. There is an initial spike in consumption when people retire, Bernicke noted, as they travel, dine out, and spend time with far-off family. But that tapers off.

"The conversations I have with my 85-year-old clients are completely different than the conversations I'm having with my 60-year-old clients, who are more apt to drive and travel," Bernicke says.

Bernicke found support in annual data from the Bureau of Labor Statistics showing that spending on food, clothing, entertainment, and housing all decline as people age. "It's not uncommon for someone in their 80s to have a seven-year-old Buick parked in their driveway with 10,000 miles on it," Bernicke says. "That's not true for someone in their 60s who will need to replace a vehicle much more often."