U.S. advisors disagree on measuring retirement incomes

Russell recommends that advisors use the net present value method, which it calls the “funded ratio”, which it argues can be used to inform decisions about their overall readiness for retirement, how much they might spend, and what investment strategies may be appropriate.

“Advisors and their clients need a meaningful reference point to discuss sustainable income in retirement, and preservation of principal or a rate of return hold very little meaning for an investor trying to fund a desired retirement lifestyle,” said Rod Greenshields, consulting director for Russell’s U.S. advisor-sold business. “This reference point needs to be tied to actual desired outcomes. Yet today, very few advisors are approaching retirement income planning in this way.”

In terms of generating income in retirement, the survey finds that most advisors opt for a total-return approach that focuses on the overall return of an investment portfolio, including capital appreciation, dividends and interest. It reports that 81% of advisors said they rely on a total-return approach.

“We are encouraged to see that so many advisors say they view retirement income through a total-return lens. However, one of the most common questions we hear from advisors regarding retirement portfolios is about yield,” said Greenshields. “Reaching for yield at the expense of sound fundamental analysis can often lead to portfolios with significant credit risk, as well as industry and style biases. To help investors sustain a retirement lifestyle, we believe that generating return through capital appreciation, dividends and income yield in a diversified, multi-asset portfolio is likely the most sensible approach.”

The largest proportion of advisors (78%) said that they most often recommend a diversified portfolio of mutual funds to help clients achieve retirement income goals, Russell reports. And, it notes that other top selections included variable annuities (49%), dividend-paying equity funds (48%), dividend-paying stocks (48%) and fixed income securities (32%).

Among the least popular options, it adds, were fixed annuities (16%), immediate annuities (19%) and mutual funds designed to produce income in retirement such as managed payout funds and target distribution funds (19%).

“With the imminence of rising interest rates and the negative returns offered by cash, investors are considering how to take on acceptable amounts of investment risk to secure the future standard of living they desire,” said Greenshields. “This environment offers an ideal opportunity for advisors to initiate a conversation around the funded ratio and an accompanying planning process that can help answer the question of the appropriate amount of risk in retirement.”

Finally, Russell also reports that U.S. advisors are eager for help with retirement income planning. It says that 53% said they want planning and implementation tools to increase or maintain their expertise in retirement income planning. They also pointed to their desire for seminars and workshops (45%), tailored self-study materials (35%) and access to retirement income specialists (32%).

“Despite their focus on retirement income planning, it is telling that advisors continue to demand more resources to help them address this important issue. There is clearly still a gap in the industry response to the retirement income challenge,” said Greenshields. “While some advisors might be wary of addressing the issue with new tools, this is a problem that must be solved with precision. We are well past the point where generalized, ‘back of the envelope’ planning is enough. Advisors and their clients need sophisticated tools and resources that deliver tailored retirement income solutions in a scalable way.”

The survey includes responses from 321 financial advisors from more than 100 national, regional and independent advisory firms in the U.S. It was carried out between August 5 and 19.