Investments

A New Approach to Retirement Planning

The old rules of thumb designed to predict the success of retirement income may no longer work in today’s environment. Why? Nowadays people in the income distribution phase must rely more on their accumulated savings to supplement their retirement due to diminishing workplace pensions. Merely taking a systematic withdrawal from a diversified, balanced portfolio may work for a while, however this same process may present real problems for the long-term especially during times of prolonged financial stress. This is obvious during years like 2008 when there was a worldwide financial crisis. However, volatility seems to be the new normal that can have a major erosive effect on a portfolio designed to provide lifetime income.

Clearly a new strategy is needed to provide stable, durable income during retirement. Consultants and academics who provide guidance in the income and wealth management fields point to three main product categories that can help mitigate risks in retirement¹. Their research has shown that a well-designed product allocation process to the following areas may be that new strategy.

  • Traditional investments i.e., stocks bonds and mutual funds.
  • Pension, income annuities, REITs and similar alternatives.
  • Guaranteed income living benefits.

Product Allocation: A Three-Part Retirement Income Strategy

As we saw in the last section, retirees who were surveyed identified their needs given today’s realities. Their top needs were identified as having the potential for a guaranteed income steam for life and the need to have steady, stable and durable income that is consistent even in down markets. Lastly, they expressed the need to avoid outliving their assets.

While Asset Allocation - the process of selecting a mix of financial asset classes - is a worthwhile process for matching a client’s risk profile and tolerance, based on the premise that different asset classes have varying performance characteristics during different market cycles. This generally has the potential effect of steadier financial performance while minimizing volatility. However, during periods of extreme market stress, Asset Allocation falls short and threatens the long-term viability of lifelong income for seniors and retirees.

Product Allocation on the other hand, may help to offset these shortcomings in the following ways:

  • Income annuities, REITs, and alternatives² provides - on the one hand, contractually guaranteed income from insured accounts. During down markets, income continues uninterrupted. Similarly, income from REITs and comparable alternatives seek to deliver stable durable income from assets that are not correlated to the financial markets. Their asset values have a longer lag time and the income while not contractually guaranteed may be consistent and durable. This works more effectively for seniors seeking lifelong income. 
  • Guaranteed income living benefits derive their income from financially engineered products that guaranteed lifetime income, such as a variable annuity with GMWB (Guaranteed Market Withdrawal Benefits) often referred to as a living benefit. This also works for seniors seeking lifelong income. These two categories have the effect of “pensionizing” a portion of seniors’ income.
  • Traditional Investments, i.e., stock, bonds, and mutual funds, and other conventional accumulation-based products are statistically shown to provide better inflation-adjusted results than other investment products over the long-term. Pensionized income from the prior two product sectors with solid performance from this category provides for a great well-rounded portfolio.

Further descriptions in the ASSET ALLOCATION section of this website provide addition detail of our strategies for generating lifelong durable income. Additional discussions on investments follow below.

Traditional Investments and Their Role

For seniors, pre-retirees and retirees whose portfolio allocation includes traditional products and non-retirees in the accumulation phase of their financial planning, it’s important to gain a broad perspective of the various types for a clear understanding of how each of them can work towards your objectives. Each has its own investment characteristics which, when applied individually, may not be appropriate for your financial profile; however, when they are strategically combined in a portfolio, they can work in concert to meet your investment objectives within your risk parameters.

It is, therefore, important to consider all investments considering your specific objectives and risk tolerance.

  • Investments for Growth Stocks
  • Equity Mutual Funds
  • Index Funds
  • Government Securities
  • Corporate Bonds
  • Bond mutual funds
  • Alternative Investments
  • Real Estate Investment Trust

These investments entail market risk which means there is always the possibility of selling an investment for less than its purchase price. Investors should fully understand their own tolerance for risk and should only consider investing as a long-term proposition. Market risk may be reduced through a well-conceived, broadly-diversified investment strategy consisting of multiple asset classes. Working together, we can help you identify your investment objectives and risk profile to create a customized, long-term investment plan.

* There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Contact us today to learn more about our personalized investment services.

1. Michael Finke, Wade Pau, David Blanchett, “Low Bond Yields and Safe Portfolio Withdrawal Rates,” 2013

2. An annuity is a long-term, tax-deferred insured vehicle designed for guaranteed income during retirement. They are insured by the full faith and credit of the underlying issuing company. Fixed annuities earn interest based on a rate declared by the issuing company. Variable annuities involve investment risks and may lose value. GMWB living benefits riders carry additional fees. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. REITs and additional income alternatives are public non-traded investment vehicles seeking to provide non-correlated income. They have low-liquidity as there is no primary market for these products. Investors must use caution before investing.