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Advisors split on how best to track retirement readiness

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Most financial advisors place a great deal of importance on retirement income planning, but these same advisors don’t agree on how best to track whether a client’s investments are achieving the desired result: sustainable retirement income.

That’s according to Russell Investments’ Financial Professional Outlook, a quarterly survey of U.S. financial advisors that found 34 percent of respondents said they measure clients’ retirement plans based on preservation of principal after distributions.

The next-largest response (20 percent) came from those who said they preferred to track the portfolio’s maintenance of a projected rate of return. Only 15 percent of advisors said they assess the net present value of clients’ projected assets against projected liabilities to gauge whether they are on track, which is the method Russell recommends advisors use. Russell, a global asset manager, calls this concept the “funded ratio.”

Russell based its funded ratio concept on the work it has done with pension plans, which typically focus on the ratio of assets to liabilities in today’s dollars to assess the funded status of the plan. By using a retired investor’s personal funded ratio to evaluate whether he or she is on track, an advisor can help clients make informed decisions about their overall readiness for retirement, how much they might spend and what investment strategies may be appropriate.

Elsewhere in the survey, 81 percent of advisors said they rely on a total-return approach, which focuses on the overall return of an investment portfolio to provide income.

Seventy-eight percent of advisors surveyed said they most often recommend a diversified portfolio of mutual funds to help clients achieve retirement income goals. Other top selections included variable annuities (49 percent), dividend-paying equity funds (48 percent), dividend-paying stocks (48 percent) and fixed income securities (32 percent).

Among the least popular options were fixed annuities (16 percent), immediate annuities (19 percent) and mutual funds designed to produce income in retirement such as managed payout funds and target distribution funds (19 percent).

The majority of advisors surveyed indicated a high degree of focus and expertise in developing retirement income strategies. Most respondents (61 percent) said they are comfortable dealing with complex retirement income plans, while another 18 percent said they have such deep expertise that others come to them for help.

That said, nearly all advisors are still looking for help in tackling the retirement income challenge. Fifty-three percent said they wish they had planning and implementation tools to increase or maintain their expertise in retirement income planning. Advisors also pointed to their desire for seminars and workshops tailored to their needs (45 percent), tailored self-study materials (35 percent) and access to retirement income specialists (32 percent).

The survey included responses from 321 financial advisors and was fielded between Aug. 5 and Aug. 19.

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