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Breaking Ground in Retirement Strategies

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This underdog has built up a loyal following as he migrated from engineering to finance.

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Jim Otar doesn't much care what you think. As the Canadian financial adviser likes to say in his eastern-Balkan accent, "You can't please everyone. I'm 58 years old. I'm deep in the 'Green Zone.' People can think what they like."

But if you're interested in retirement income, you probably will care what Otar thinks. Since he switched from engineering to finance in 1994, his articles, books, and Retirement Optimizer planning tool have become increasingly mainstream.

Or perhaps the mainstream has become increasingly Otarian.

"In the beginning, it was very lonely," he told me. "[William] Bernstein's Retirement Calculator from Hell triggered my first questions in 1996. I said, 'That is what I'm trying to tell everyone: You cannot have an assumed growth rate.' That's when I started developing my ideas, which became my first book, High Expectations and False Dreams, in 2000."

Since then, Otar, who still practices as an adviser, has become better-known. His 2002 articles in Financial Planning magazine won a CFP Board award. His website and his $29.95 Retirement Optimizer planning tool (now $99.95) have a cult following in Canada. He contributed to Harold Evensky and Deena Katz's' 2006 book Retirement Income Redesigned.

This month, he published "Unveiling the Retirement Myth: Advanced Retirement Planning Based on Market History", a 525-page tome that details his zone system for building a portfolio of investments and, if necessary, income annuities. He offered an early edition for free online in August, but the number of requests for downloads overwhelmed the server.

Otar's fans -- including quite a few members of the Bogleheads discussion group -- often note his mechanical engineer's approach to retirement income planning. That includes a skepticism of straight-line projections, a scrupulous accounting of all sources of friction, and a belief in establishing margins of safety that can withstand Black Swan events.

Few people in the US retirement income profession claim to know much about Otar, but at least one vouched for him enthusiastically. "I have copies of Jim Otar's earlier books, and in my opinion he has done excellent work in the field," says Bill Bengen, an El Cajon adviser who also contributed to Evensky and Katz's book.

"Aft-casting"

Otar's system assigns near-retirement clients to one of three zones.

Those in the Green Zone can draw down their savings at a sustainable rate and still cover their living expenses. Those in the Red Zone will go broke early unless they buy annuities. Those in the Gray Zone fall somewhere in between.

Whichever zone a client happens to fall in, Otar can determine how much savings should be allocated to stocks, to bonds, or, if the client's savings can't produce enough income any other way, a ladder of income annuities.

Personably written and replete with charts and graphs, the book details Otar's financial philosophy. For instance, he rejects Monte Carlo analysis in favor of "aft-casting."

"Forecasting says 'I'm assuming an 8% return and 3% inflation.' In aft-casting, each portfolio value is calculated for each year since 1900. I take all lines and put them on the same chart. It's actually market history," he said.

"I try to take the dividends out because right now the rate is about half what it once was. Then there are management fees. You have to include that as well. So I take the indexes and inflation rates from the past and I apply an adjustment for current dividends and portfolio costs. Then I have an outcome I call an aft-cast."
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No positions in stocks mentioned.
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