Data & Research September 9, 2007

Russell Paper Outlines Retirement Income Approach

A new paper from Russell takes issue with the traditional two strategies recommended by financial advisers to hedge against longevity risk: buying guaranteed annuities and/or reducing spending should markets under-perform expectation.
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In the paper, “Modern Portfolio Decumulation: A New Strategy for Managing Retirement Income,’ published in the August issue of The Journal of Financial Planning, Richard Fullmer, a senior strategist at Russell Investment Group, sets for his strategy for retirement income planning and portfolio construction and argues there should be two different strategies for acquiring wealth and one for making sure individuals get enough of a lifetime cash flow from their portfolios, which must take into account longevity risk.

The goal of asset decumulation strategies is to improve an individual’s ability to obtain a stable and steady stream of income for life from a retirement portfolio, with a secondary goal to preserve wealth for one’s beneficiaries, the paper says. In order to achieve this, Fullmer contends that longevity risk can be turned into investment risk, allowing it to be managed within an investment portfolio. This means that individuals will not have to make spending adjustments immediately and might be able to delay the use of annuities until later.

“Using this approach, it is the portfolio, rather than the investor’s standard of living, that first responds to market performance and economic conditions,” said Fullmer, in a press release about the paper. “Furthermore, it seeks to allow the investor to preserve liquidity early in retirement and purchase a desired income stream in the future. There is no doubt that annuitization offers retirees a valuable benefit that an investment portfolio cannot – a guaranteed lifetime income stream. However, annuitization may also have drawbacks.’

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Fuller does not make the case against annuities, just suggests delaying their use to “at some point in the future when it makes strategic sense.”

According to the press release, the paper provides a detailed explanation of how such a strategy could be executed. It describes a new multiple period cash-flow-based investment framework that incorporates a dynamic asset allocation strategy and uses the projected cost to annuitize the investor’s desired lifetime income stream as a hurdle for managing longevity risk within the portfolio.

“This new approach seeks to allow investors to maintain a desired standard of living while at the same time preserve their wealth for gifts or bequests,’ said Randy Lert, chief portfolio strategist at Russell, in the release. “By combining longevity and investment risk they can be managed holistically and thus more effectively. This provides an intuitive and simple way for planners and advisers to assist their clients by evaluating at any point in time whether it makes sense to continue to invest or to annuitize.’

The paper can be viewed in full here.

IMHO September 7, 2007

IMHO: Just Another Day?

This week I’m going to do something I never thought I would do again.
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I’m going to fly on September 11.
OK, so, in the overall scheme of things, it’s perhaps not that big a deal. I know that it’s been six years, that part of our not letting the terrorists win is to go on about our normal lives. I don’t even know anyone personally who died in the attacks, though I know people who do. At the time of the attacks, I wasn’t living in the parts of our nation targeted (although we relocated to the Northeast soon afterward). It’s not like I plan to spend some significant part of the day in prayer or contemplation—and it’s certainly not that I believe for one second that there will be a recurrence of those horrific events just because it’s the sixth anniversary.
I was, however, traveling by air on that fateful day, only to be grounded hundreds of miles away from friends and family (see “Never Forget“). I know that others were stranded farther away from their loved ones—and perhaps for longer. But it was a time when I wanted—more than I could possibly have imagined at the time—to be with my family. It was a time when people who love each other should have been able to comfort and reassure each other.
Somehow, the notion of once again being hundreds of miles away from my family on that day just seems wrong. Not as wrong as missing a birthday or graduation (I’m still batting 1.000 there)—but wrong, nonetheless. Whatever else we try to make of it, for this generation anyway, September 11 will always be “different.’
Like you, I’ll always have my memories of that day. I’ll never approach getting on an airplane the same way again, for one thing. I doubt that I’ll ever feel as “safe’ as I once did, but I also appreciate in a very special way, every day, the love of my family, the support of friends, the joy of being alive—and the responsibility to remember always that there are those whose reunion with their loved ones still lies ahead.
I may be traveling this September 11. But it is not—and should never become—“just another day.’
Peace.

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