In 2015, Josh Curtis, the founder of Clarity Financial, began searching for a new income model for his clients in retirement. The ideal model would deliver higher potential withdrawal rates, reduce sequence-of-returns risk, and help clients stay invested during volatile markets. He uncovered the Portfolio Waterfall™ concept using the “first principal” thought process – boiling the problem down to its basic principles. In this search, he sought to answer two questions.
First, in what ways should an income-focused portfolio differ from an accumulation-focused portfolio? And, second, why do traditional income withdrawal strategies limit investors to 3-4% of the portfolio value? This process uncovered new efficiencies that allowed an increase in income withdrawals and higher internal returns. The key to this efficiency is to keep money flowing across the portfolio instead of relying on traditional reinvestment theories.
The other key principle is to take income withdrawals only from stable accounts rather than from accounts with variable returns. This shift reduces the investor’s need to liquidate shares in volatile markets and helps the portfolio recover more quickly after market downturns.
Overall, we believe the Portfolio Waterfall™ helps clients understand how their portfolios are built and enables higher income withdrawals. Taken together, these things bring new life to their retirement. Since the discovery of the Portfolio Waterfall™ in 2015, the strategy has been reviewed by several CFA’s and investment analysts at some of the largest firms in the industry.
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