Ray Lucia has posted a response to the SEC charges against him, which you can view on his website.

Lucia spends a minute or so explaining what the charges are (and what they are not) and then takes up the allegation he says is at the root of the charges filed by the U.S. Securities and Exchange Commission: his use of a 3 percent historical inflation rate in his retirement planning strategy.

Lucia notes that the 3 percent historical rate is “universally accepted by among others the AARP and the federal government, including the SEC.”

It’s an excellent strategy no doubt devised by Lucia’s lawyers at Locke Lord in Los Angeles. It puts gets him out quickly with a response that zeros in on the weakest link in the SEC allegations and attemps to spin the allegations as a dispute over statistics.

Of couse, it’s more than a dispute over statistics. Lucia goes out and tells people that his “Buckets of Money” strategy has been proven over time to allow them to retire in comfort. Lucia claims that he has “spent 20 years refinining” his “time-tested” strategy, which follows “science, not art.”

Well, sure that’s what everyone wants to hear. But when the SEC asked for proof, Lucia coughed up nothing more than a pair of two-page Excel spreadsheets put together by one of his employees in 2003.

And it’s the employee spreadsheets that use this hypothetical 3 percent inflation rate. The actual historical inflation rates available here show a wide fluctuation in inflation rates over time. In 1974, the year of the OPEC oil embargo, inflation zoomed to 11 percent. In 1980, after another oil shock and the Iran hostage crisis, it was 13.5 percent.

The SEC notes:

Lucia admittedly knew that using a lower inflation rate for the backtests would make the results look more favorable for the [Buckets of Money] strategy.

This is the heart of the issue: Lucia used the lazy, shorthand of 3 percent because it makes him look better. Those “Buckets of Money” don’t look quite so full when you use the actual (higher) historical inflation numbers.  For the same reason, Lucia also didn’t include the massive fees his clients are charged. Apparently, the way to keep your bucket full is to pretend that inflation is less than it really is and ignore the high fees you’re paying.

As a radio host broadcasting his message over many radio stations, Lucia has a huge soapbox. As an SEC registered investment advisor, Lucia has a duty to do the math, to tell his clients the straight truth. So kudos to the SEC for calling his bluff.