In his article, “The Retirement Income Death Spiral,” retirement researcher James B. Sandidge concludes that, “[there] is not a smooth transition from sustainable to failing because principal erosion accelerates abruptly, throwing the portfolio into a death spiral.” To measure the likelihood of portfolio failure, Mr. Sandidge developed a rule of thumb he calls the Momentum Ratio (MoRo). This ratio is determined by dividing the sum of negative percentage changes in the household portfolio account during retirement by the sum of the positive changes. According to Mr. Sandidge:
“When I applied the MoRo to historical portfolios going back to 1900, I found that portfolios with ratios of more than 100 percent during the first 15 years, 125 percent during years 16–20, and 150 percent during years 21–25 had a high failure rate. Conversely, those with ratios below those thresholds had a high success rate.”
Further, his research showed that deterioration of a retired household’s portfolio may occur much more rapidly than expected.
While Mr. Sandidge’s MoRo rule of thumb has some appeal, we believe that the process of annually Measuring and Monitoring your household Funded Status and Making changes to your spending plan when your Funded Status falls outside a reasonably determined corridor (guardrails), is a much more robust approach for keeping your spending on track, consistent with your spending goals and out of potential “death spirals.”
