Six in ten financial service professionals say their clients are in or near retirement, but the advisors take different approaches to designing sustainable retirement plan.
Russell Investments discloses this finding in latest Financial Professional Outlook, a quarterly survey of U.S. financial advisors. In addition to topics regularly covered in the survey, the new report examines advisors’ varying approaches to retirement income planning.
Among the survey’s key findings:
- More than half (52 percent) of advisors say that “setting reasonable spending expectations” is a top challenge when serving clients near or in retirement, followed by “maintaining sustainable plans” (44 percent) and “determining sustainable spending policy” (33 percent).
- A quarter of respondents (25 percent) say that they ground their plans on pre-retirement spending patterns. More than 1 in 5 (22 percent) indicate that they use a rule of thumb like the “4 percent rule.” And 19 percent say they use a time-segmented bucket strategy.
Russell Investments promotes the use of the funded ratio, which the firm describes as a “more scientific method” to evaluating retirement spending. The survey observes, however, that only 16 percent of advisors use the method.
Incorporating risk capacity, the investor’s funded ratio represents the surplus or deficit of assets necessary to fund lifetime retirement liabilities. This benchmark helps measure the feasibility of a spending plan and can be used to monitor and adapt a portfolio’s allocation through time.
The ratio, plus asset allocations on which the ratio is based, relies on the capacity for risk as determined by the client’s assets. This contrasts with the client’s self-reported tolerance for investment risk.
When asked about asset allocation:
- 38 percent of advisors say they use a risk profile questionnaire to determine allocation; and
- 26 percent of respondents say they use an analysis of their client’s assets and liabilities (the funded ratio). The latter option allows advisors to adapt asset allocation based on their clients’ capacity for risk, rather than clients’ self-reported risk tolerance.
Despite current low yields, two-thirds of advisors (66 percent) believe that yield-focused strategies are a good option because they protect the client’s initial investment, are sustainable, and are simple for investors to understand. However, 30 percent of advisors don’t like yield-focused strategies because:
- current yields are not attractive enough to meet clients’ retirement income needs;
- yields change over time;
- a yield-focused strategy presents too many challenges to support consistent income;
- and the risk/return trade-off is too great.
See the infographic on the following page for highlights from the survey’s findings (click to enlarge infographic).