Your Money Ratios, a review
November 03, 2014
My review of Your Money Ratios by Charles Farrell
I want to like this book.
The author has a solid grasp of safe withdrawal rates established by the Trinity study as well as realistic portfolio success rates based on historic periods. However, there is very much an assumption baked in that this book is targeted at someone working to full retirement age and then living on more than they were making while working. That is, work until you’re 65 while living on 60% of your gross salary and then you can live on 80% in retirement. If your goal is to retire sooner and live on that same 60% then you won’t find much in the way of guidance here (although I can appreciate that is well outside Mr. Farrell’s scope for this book).
Likewise, there’s some small breakdowns along similar lines if you find yourself in the position of being behind the ratios. You must live on less and save more. Conversely, though, if you’re able to live on 50% and save the remainder then you would likely be comfortable in retirement at less than 80% gross pay replacement.
I found the buy vs rent advice to be solid. Doubly so for the discussion on life, disability and LTC insurance (all given meaty chapters appropriate their weight). This book is pre-ACA so the health insurance section may be outdated (although the author has likely addressed this on the accompanying website)
My two hangups about the book revolve around Mr. Farrell’s recommended asset allocation and his insistence on using a financial services professional.
His recommendation on asset allocation, broadly, is 50/50 stocks and bonds with stocks mainly large-cap US with some international and bonds all long-term treasury bills. With a catch. You never rebalance bonds into stocks. So, if stocks rise enough above 50% of your portfolio, rebalance into bonds. If stocks drop well below 50% of your portfolio (hello 2008) then you let them ride. This significantly limits your downside but it also hampers your upside. This is fine advice for someone in their 40’s or 50’s but I’m not convinced it’s an appropriate risk model for someone in their 20’s or early 30’s.
The flip side to this is that most portfolio growth for someone just starting out will be through contributions. So, with stocks dropping, you’d be purchasing assets on sale with new money while locking in old gains via bonds.
I think a better option would be to individually assess your risk tolerance and then choose an asset allocation based on that. This might include low-beta (or hopefully low-beta) assets outside of a straight stock/bond split and it might lead to a less cookie-cutter stock/bond allocation.
On the financial planner front, the author does spend a good amount of time educating the reader on what they should look for in a financial advisor. While he mentions FINRA and ethics, he neglects to talk about the fiduciary oath. He also insists, repeatedly through the book, the importance of working with a financial advisor. Given the wealth of information available as well as DIY plans from the likes of Vanguard, Fidelity, or most any 401(k) plan these days, I’m simply not convinced. I suspect that the need for a financial advisor for most of us (not-high income, not-high asset) may come down to comfort level with procuring life, disability and long-term care insurance.
Overall, this was a good book to cover the basics of a road to retirement. However, I’d recommend Bogleheads’ Guide to Investing and Bogleheads’ Guide to Retirement before this book.