The needs of retired clients are substantially different from those who are still in the process of accumulating assets in anticipation of retirement. Advisers should compare a retired investor’s assets to his liabilities to help fix spending, asset allocation and insurance decisions, according to Russell Investments.
Russell released a paper on Adaptive Investing, a patent-pending methodology, to manage retirement income portfolios. “Adaptive Investing: A Responsive Approach to Managing Retirement Assets,” by Sam Pittman and Rod Greenshields, is aimed at financial advisers who help individual clients meet income needs in retirement.
A retirement plan needs to balance client spending goals with the available assets, the report said. And assets need to take into consideration the liabilities they will fund. “Retirees want consistent income from their portfolios,” said Pittman, a senior research analyst at Russell.
An adviser should first compare the size of an investor’s assets to liabilities. By establishing the ratio of assets to liabilities and arriving at an investor’s funded ratio, an adviser can help a retiree make spending decisions and determine readiness for retirement. In an asset-liability framework, the asset allocation is guided by the wealth, spending needs and the lifespan of an investor.
A primary goal of adaptive investing is to achieve income sustainability for life without first having to buy an annuity. Instead of purchasing an annuity at the outset, the retirement portfolio is managed so that an investor maintains the option to purchase an annuity later.
“Many planning approaches try to mitigate longevity risk by planning to a fixed age that is either at or beyond the life expectancy, but there is still a chance the client may live past the selected ending age. Using a predetermined ending age can lead to an overly restrictive spending plan if the age is set too high and an overly risky one if the age is set too low,” said Greenshields, consulting director of the U.S. private client consulting group in Russell’s adviser-sold business.
During retirement, advisers have traditionally used fixed mix allocations—static models such as the classic 60% equity/40% fixed income portfolio—to invest client assets. However, these strategies are not designed to solve a specific income problem, since they address only the asset side of the equation.
By contrast, institutional investment managers tasked with meeting specific liabilities (for example, streams of future pension payments) develop specific asset allocation strategies to meet these needs.
“Advisers play a critical role in helping their clients meet retirement income goals. Russell’s Adaptive Investing relies on the adviser keeping a close eye not only on clients’ portfolios, but also on their spending plans,” Greenshields said.