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 report released Thursday.
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
- 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, noted 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 said in a statement.
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.