Six months ago, Manish Malhotra was a senior vice president at beleaguered Citigroup, tinkering with retirement income planning software. Now, as CEO of New York-based Fiducioso Advisors, he’s an entrepreneur who’s promoting his own decumulation tool.
A formal launch of his Fiducioso Investment Analytics Platform is months away. But last week Malhotra demo-ed it for the Retirement Income Industry Association.
The platform is intended to help advisors build guaranteed income streams out of annuities and a Maturity Matched Portfolio (MMP) of Treasury Inflation Protected Securities (TIPS), with withdrawals from a portfolio of stocks and bonds when needed.
“With the MMP, we can build inflation-protected income out of laddered TIPS that should be sufficient to meet the needs for a specific year,” Malhotra told RIJ in an interview this week. “If the TIPS don’t mature in a given year or if inflation expectations change, we take money from the SWP (systematic withdrawal program) account. We look at everything together, and all of the buckets are feeding money at the same point.
“We can build a plan for any degree of risk that the investor is comfortable with,” he added. “The first thing you can choose is the goal risk. You can choose a worst case for how long your money lasts. We will find a plan that gives you the maximum income within the constraints that you give us. In our next demo, to make life a little easier, we’ll have five default plans.
“Our core business will be licensing. Our client base is primarily financial advisors and wealth management firms. We won’t be going to retail retirees. The current direction is to license it on a per plan basis—that is, the license includes a financial plan based on the software—but if there is interest in an annual subscription we’re open to that.”
Taking FIAP for a spin
In short, FIAP is a “bucketing” tool. It creates income from several sources at once (like Briggs Matsko’s E.A.S.E. system) rather than assigning specific assets to specific time segments in retirement (like David Macchia’s Income for Life Model or Curtis Cloke’s THRIVE program).
Malhotra says time-segmentation didn’t appeal to him. “We could set up 30 lock boxes, one for every year of retirement. But if you wanted a 90% confidence level of success from that method, the sustainable payout rate would be only 3.48%. By pooling the money [the way we do], your payouts are improved,” he said.
The maturity-matched ladder of TIPS is the keystone of Malhotra’s approach. The ladder can stretch for five, ten or more than 20 years into retirement. Each rung can consist of zero-coupon or coupon-bearing bonds. The client liquidates a set of bonds each year, supplementing the income with semi-annual interest payments from the remaining bonds if desired.
The client’s remaining assets can be put into at-risk investments and income annuities. The allocation depends in part on what degree of portfolio failure risk—the risk of running short of money—he or she can tolerate. The tool spits out a variety of allocation options, singling out (with a green dot among competing red dots) the one that produces the highest income at the lowest tolerable risk.
A Schematic of the Financial Investments Analytic Platform
Source: Fiducioso Advisors, 2010.
The tool is product neutral, so money managers who use the software can plug in the kinds of funds, ETFs, or annuity products that they already use or like. Advisors can use ready-made tools like the PIMCO TIPS payout fund as a substitute for a custom-made TIPS ladder, Malhotra said.
A ladder of TIPS can produce more income with less risk than a conventional systematic withdrawal plan, Malhotra claimed. A 23-year TIPS ladder, he said, can safely produce a 4.6% annual drawdown from age 65 to age 95. That beats the traditional 4%. On a $2 million portfolio, that would mean an annual income of $92,000 versus $80,000.
This week, I took the demo of the FIAP for a spin. The tool let me choose my desired retirement income (from $35,000 to $80,000 from my hypothetical $1 million portfolio), tolerance for “goal risk” or portfolio failure (10% or more), the length of my TIPS bond ladder (zero years, five years or 10 years), the bond allocation of my investment portfolio (20% to 100%) and my desired allocation to a joint life fixed immediate annuity (0%, 25%, 50%, 75% or 100% of my assets).
As a baseline scenario, I chose a 0% chance of running out of money over 30 years, no TIPS ladder, a 60% stock/40% bond investment allocation, and no annuities. Given those constraints, the tool allowed me a safe withdrawal rate of $39,000 (very close to the traditional 4% rate), plus $30,000 from Social Security.
Then I tried turning a few of the dials. If I raised my acceptable risk of portfolio ruin to 10% (introducing the chance that I might run short of money after 23 years in retirement), the tool bumped my income to $74,000. If I introduced a 10-year TIPS ladder (which would absorb $430,000 of my $1 million) and put 80% of my SWP money in bonds, the tool suggested a safe income of just $67,000.
That was just the demo. There are more demos to come before the formal commercial launch next year. “In our next demo, to make life a little easier, we’ll have five default plans,” Malhotra told RIJ. The tool will also allow for tax-efficient withdrawals from taxable accounts, tax-deferred accounts, and Roth accounts, in that order. At a time when more and more advisors are thinking about retirement income, and about establishing guaranteed income floors for their clients, Malhotra expects his product to find a niche.
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