Advisors are still struggling with the best way to create retirement spending plans for their clients, with no single strategy emerging as a clear leader.
That’s according to the latest quarterly survey of U.S. financial advisors from Russell Investments, which found that how to come up with an appropriate spending policy was one of their top concerns.
While the “Financial Professional Outlook” found that advisors’ other top worries were “setting reasonable spending expectations” (52 percent) and “maintaining sustainable plans” (44 percent), “determining sustainable spending policy” was high on the radar for 33 percent of respondents. This was despite the fact that more than 60 percent of survey participants said that more than half of their clients are in or near retirement.
When clients are already retired, one might think that it’s a bit late to worry about how to create a sustainable retirement spending plan that accounts for market volatility and other unpredictable financial shocks. But there’s still cause for alarm, and perhaps time to adjust, since surprises may be in store.
Why might this be necessary? “While generating sustainable retirement income for their clients is already a challenge for advisors, the eventual rise in interest rates could certainly further impact the financial security of those in or near retirement,” said Rod Greenshields, consulting director for Russell’s advisor-sold business.
“With the Fed’s quantitative easing measures drawing to a close and the American economy back on line, there could be momentous implications for retirees once interest rates rise,” Greenshields continued.
What are advisors doing now regarding spending plans? According to survey respondents, 25 percent base retirement spending plans on client spending patterns prior to retirement. Twenty-two percent follow “a rule of thumb like the ‘4 percent rule,’” and 19 percent use some type of time-segmented bucket strategy. But those aren’t the right approaches, according to Greenshields.
“Common approaches like the ‘4% rule’ are easy to understand, but do not account for a client’s individual circumstances and can lead to unintended mistakes,” he said. “At Russell, we think advisors would do well to follow the lead taken by defined benefit plans and calculate a funded ratio (the actuarial net present value of assets divided by expected lifetime liabilities).”
According to Greenshields, finding the cost of a client’s liabilities compared to the value of their assets may be “more sophisticated” math, but “the outcome is a simple yet powerful percentage that most clients understand immediately.”
One reason the funded ratio is a preferred method, according to Russell, is the client’s risk capacity.
While 38 percent of advisors said they use a risk profile questionnaire, based on the client’s estimate of how much risk he can tolerate, to set the asset allocation in client portfolios, they should think instead, as clients near retirement, about how much risk client assets can tolerate while still funding retirement expenses.
Using a funded ratio incorporates risk capacity, and it can then be used to adjust a portfolio’s allocation as client needs change or the economy itself warrants.
Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.
Your access to unlimited BenefitsPRO content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking benefits news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
