Advisors who are helping clients avoid running out of money before they die can best solve the retirement income problem by balancing client spending goals with available assets and liabilities, said Russell Investments researchers in a recent report.
Russell’s research paper, “Adaptive Investing: A responsive approach to managing retirement assets,” calls for shifting from an asset-only view of portfolio management to a broader approach that focuses on:
- A funded ratio that compares assets to liabilities, resulting in a single surplus or shortage number that determines spending needs and retirement readiness;
- The risk of outliving assets, guided by wealth, spending needs and lifespan of the investor; and
- The option to buy an annuity later if needed.
“Retirees consistently express three primary needs concerning retirement wealth management: they want low risk of outliving their assets (sustainability), consistent income (predictability), and financial flexibility (liquidity),” write authors Sam Pittman and Rod Greenshields in the report aimed specifically at financial advisors who are helping individual clients meet their retirement income needs. “As investors seek advice, financial advisors that deliver retirement solutions to meet these needs will better serve their clients, thus strengthening their practice.”
Greenshields, consulting director for the U.S. private client consulting group in Russell’s advisor-sold business, notes that advisors play a critical role in helping clients meet retirement income goals. “Russell’s ‘adaptive investing’ approach relies on the investor’s advisor keeping a close eye not only on their client’s portfolio but equally important, on their spending plans,” Greenshields says in a statement.
The first step
The first step in achieving adequate retirement income is to compare assets to liabilities and create a funded ratio, the authors say. When constructing a retirement plan, the advisor should compare the size of a client’s investments and future savings to his or her debt and future spending needs. That ratio of assets to liabilities, or funded ratio, helps the retiree make informed decisions about how much to spend—and whether he or she is truly ready to retire. The funded ratio number sets a guidepost for spending, asset allocation and insurance decisions.
A primary goal of Russell’s adaptive investing approach is to help the client achieve income sustainability for life without initially having to buy an annuity. Rather than purchase an annuity at the outset, the retirement portfolio is managed so that an investor maintains the option to purchase an annuity later.
“Retirees want consistent income from their portfolios and to avoid running out of money before they die,” says Pittman, a senior research analyst at Russell, in a statement. “They also want to maintain control of their assets for as long as possible. In fact, many would like to be able to bequeath any remaining assets to heirs or charitable organizations.”