NEW YORK (TheStreet) -- In a quest to achieve a life-long retirement income, investors worry about how much to spend, as well as how to protect their precious portfolio. Typical investment mixes can include a “balanced” portfolio -- evenly split between stocks and bonds -- or an “income” portfolio of all, or nearly all, bonds. There are countless other allocations to consider, as well.
Once properly invested, retirees are frequently reminded of the “4% rule”: Withdraw up to 4% of the portfolio’s value annually, no more. But with low-interest rates impacting portfolios, the 4% rule has become a sometimes broken rule of thumb.
A couple of years ago, Jason Scott and John G. Watson, researchers at Financial Engines in Sunnyvale, Calif., developed an alternative investment mix: the floor-leverage strategy, saying the portfolio “strikes a balance between precision and simplicity.”
“The floor-leverage rule is a spending and investment strategy designed for retirees who can tolerate investment risk but insist on sustainable spending,” the researchers wrote in September of 2013. “The 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.”
Leverage is, in effect, borrowing money to multiply an investment. Three times leverage triples the result: positive or negative. It’s not for the faint-hearted. But, in this case, 85% of the portfolio is in “safe money” – Treasuries, government bonds, a “late-life” annuity – or perhaps even cash considering today’s shaky bond market. The remaining 15% is supercharged by using leveraged ETFs or mutual funds.
Georg Vrba, a consulting civil engineer living outside of New Haven, Conn., believes the floor-leverage strategy was a seed of an idea that needed improvement. He contends mathematical models can predict the stock market better than financial "experts.” Vrba calls his modification of the strategy the floor-surplus portfolio. It still utilizes leverage, but tactically – moving in and out of the oversized stock market bet as market signals indicate.