By John Kimelman
September 20, 2024
https://www.advisorhub.com/resources/denounce-4-percent/

“The problem with these withdrawal rules is that the number is always changing,” says Scranton. “Traditionally, the withdrawal rate that became popular was 4% of principal per year, but at some point, in a low interest-rate environment, Morningstar said you can only safely take about 2.7% of principal per year. But now some are back to saying 4%, and others are even saying 5%. No one can agree on how much you can withdraw safely.”

Renewable Income Streams, A Wellspring of Funds

While many money managers build portfolios based mostly on growth-oriented large-cap stocks, in the pursuit of capital appreciation, Scranton’s firm has made its mark by providing enough steady income each year so that it becomes unnecessary to withdraw principal to fund a retirement.

He’s done it by creating separately-managed accounts built mostly with individual bonds, preferred securities, real-estate investment trusts, business development companies, and dividend-yielding stocks. “Our income first, growth second approach generates renewable income streams that can fund recurring retirement expenses,” Scranton says.

It’s an approach that has allowed Sound Income Strategies, with its network of captive and independent advisors around the country, to garner more than $3 billion in assets. And Scranton has become a sought-after speaker at conferences and other venues, on the topic of income-oriented investing. He also hosts his own radio show, “The Retirement Income Source,” which airs weekly on stations around the country.

Scranton points out that modern investment portfolios – built largely on US-based large-cap growth and value stocks – simply don’t generate enough income, especially after subtracting investment management and broker-age fees that can exceed one percent of assets. And while advocates of a “growth first, income second” approach may point to the outsize gains that stocks have generated over the past decade, there is no guarantee that these gains will continue over the next decade or more.

“What if we get a 13-year period like the year 2000 through 2012, when the market was essentially underwater because of events like the big drop in technology stocks in 2000, combined with the financial crisis in 2008?” Scranton asks.

Scranton understands the allure of stock-oriented investing strategies that many in the advisory community pursue. For the first 12 years of his career as an investment advisor, Scranton followed a more conventional approach to building portfolios for his clients.

But in 1999, as many household name tech stocks climbed to dizzying heights, Scranton had a realization that would dramatically alter the course of his career. “I was looking at high P/E ratios across the market, and I said to myself that this is going to blow up, and it’s going to be bad for a while, and I have to shift my model,” he says.

A Shift in Time Protects Investors

So Scranton began reallocating his clients’ assets into securities such as bonds, preferred securities, annuities, and real estate investment trusts. These moves helped protect investors from the bursting of the tech bubble in 2000. “I realized that people needed income, and there was no one out there that was doing what we were doing,” he adds. Scranton had essentially stumbled into a specialty investment business. “In the following seven years after I became an income specialist, my business grew tenfold. It all came about because I was just trying to save my clients from the stock market bursting.”

Even during the low-interest rate environment of three or four years ago, Scranton said that the average client using Sound Income Strategy’s mix of investments was earning a 4% yield, net of money management and broker-age fees. Currently, he says, clients are getting 5% to 6% net of fees, depending on how they are allocated.

While a portfolio designed to generate steady income “is not going to go to the moon, you don’t need to be a market prognosticator to get people to realize the wisdom of not spending your principal in retirement,” he stresses.

An Investment Approach that Yields Long Term Relationships

Scranton says the advisors who use Sound Income Strategies’ approach tend to focus on clients who are ages 55 and older. “If you want to fish, you have to fish where the fish are. This is the crowd that has the assets to invest, and they desperately need income. But they are getting bad advice from a lot of traditional growth-oriented retirement planners.

“These planners can often lead you up to retirement, but then they don’t know how to take you through retirement,” he adds, “which is why you have all these crazy withdrawal strategies.”

Scranton says that his investment approach should appeal to advisors seeking customers that they can hold onto for the long run. “You talk to clients about their goals, what they want to accomplish in retirement, and then you make it happen with a renewable resource, so that they spend their money and enjoy those retirement dreams guilt-free,” he says. “You have got that client locked in forever, because you’ve changed that client’s vision of what retirement investing is.”

David J. Scranton, CFA^®, CFP^®, ChFC, CLU is an Amazon bestselling author, nationally known money manager, and the founder of Sound Income Group, Sound Income Strategies, Retirement Income Source, and Sound Income Academy, formerly known as Advisors’ Academy. He is recognized as one of the industry’s leading business mentors, sales coaches, and authorities on investing for income. He has made a name for himself by helping investors nationwide achieve their retirement goals, and by teaching hundreds of fellow advisors how to do likewise while achieving dramatic business growth in the process.

David’s prosperity is a product of the achievements of the many advisors he has coached and mentored. Likewise, the success of those advisors stems from their ability to provide clients with reliable investment alternatives aligned with their goals, and actively managed through Dave’s SEC Registered Investment Advisory and money management firm, Sound Income Strategies.

David has frequently shared his market insights on networks such as Fox Business, CNBC, and Bloomberg. He also has his own radio show, “The Retirement Income Source,” and hosts the popular “Retirement Income Source” YouTube channel. For four years David hosted the nationally televised program, “The Income Generation,” on which he discussed the markets and investing with some of the most renowned thought leaders in the industry, including Steve Forbes, Robert Shiller, Marc Faber, and Peter Schiff.

David’s books include the Amazon bestsellers, “Retirement Income Source: The Ultimate Guide to Eternal Income” and “Return on Principle: 7 Core Values to Help Protect Your Money in Good Times and Bad,” and the forthcoming “Attract & Grow: The Financial Advisor’s Blueprint for Attracting $50 Million in Annual Assets.”