One size clearly does not fit all when it comes to retirement planning. Although 60% of advisors said more than half of their clients are in or near retirement, in the latest Financial Professional Outlook by Russell, there was no consensus on the best way to build sustainable retirement income.
The Outlook, released Thursday, suggested that advisors follow pensions’ funded ratio strategy to get a better handle on the amount retirement income clients need.
The Outlook found over half of advisors said that setting reasonable expectations for their clients’ spending was a top challenge, and a third said they struggled to settle on a sustainable spending policy.
A quarter of respondents said they examine clients’ pre-retirement spending to determine their spending in retirement, and 22% said they use popular rules of thumb like the 4% rule. About one in five uses a bucket strategy.
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“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,” Rod Greenshields, consulting director for Russell’s advisor-sold business, said in a statement.
Russell encourages advisors to follow defined benefit plans’ examples and use a funded ratio strategy, but just 16% of respondents said they do so. With a funded ratio strategy, advisors divide the net present value of a client’s assets by their expected lifetime liabilities.
“By determining the cost of a client’s liabilities compared to the value of their assets, the funded ratio offers a superior method of evaluating retirement readiness,” Greenshields said. “The math behind the ratio is sophisticated, but the outcome is a simple yet powerful percentage that most clients understand immediately.”
Greenshields noted that market challenges complicate an already complicated process for advisors.