Think Advisor

I recently read another story in the trade press about an advisor approaching income for clients in retirement with an investments-only strategy. In my decades working with advisors, this approach is all too common.

And, for the retiree, cash flow versus income is a distinction without a difference.

While the article acknowledged investors’ increased fear of outliving their money, the advisor’s recommended solution was to increase risk within their portfolio rather than proposing an allocation to an annuity, a product purposely designed to deliver secure retirement income and address longevity risk.

Unfortunately, this line of thinking is not unusual. Over the past 40 years, to combat lower interest rates and expanding longevity, advisors have resorted to strategies that involve more risk in retirees’ portfolios. The formerly standard practice of derisking an equity-heavy accumulation portfolio to a fixed income-heavy retirement portfolio as retirement nears rarely happens anymore. A stocks-fixed income allocation of 60-40 (or even more heavily weighted to stocks) is now a retirement portfolio standard.

Historically, the 60-40 portfolio would yield 6% to 7%, a return that could fund a 4% safe withdrawal rate for 30 years of retirement. However, as many advisors plan for life expectancies to age 100 and sometimes beyond, there is a need to either lower the safe withdrawal rate, which is not popular with clients, or attempt to increase yields from the portfolio, which means taking more risk.

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