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.

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.’

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.