CHICAGO -- Want to boost your clients retirement income by 29%? There are five things advisors can do to help clients meet their retirement goals, David Blanchett, Morningstars head of retirement research, told advisors at the Morningstar Investment Conference.
While many advisors may already be doing all or some of these things in their planning with clients, Gamma, a concept from Morningstar seeks to quantify the value of good investment advice. Gamma includes the following five strategies:
1.TOTAL WEALTH ASSET ALLOCATION
Advisors should consider more than just financial capital in their assessment of a clients total wealth, Blanchett explained.
While financial capital represents tradable assets or the clients total saved assets, human capital represents the clients ability to earn and save. Human capital is the net present value of future earnings and as people age it decreases, Blanchett said. As you get older you transform your human capital into financial capital.
A total wealth asset allocation strategy must also take human capital into account, Blanchett noted. This way the allocation is based not only on a clients risk preferences, but on their ability to assume risk, as well.
2. DYNAMIC WITHDRAWAL STRATEGY
Is the 4% withdrawal rule safe? Not in every situation.
Given the current market conditions -- where the price to earnings ratio is 25 and the initial bond yield is about 2% -- there is a 41.6% probability that money will last 30 years with a 40% stock portfolio Blanchett said. While this measures success based on a 30 year time-frame, thats not how clients measure it, Blanchett pointed out. Failure for retirees is not failure over 30 years, it is failure while still alive.
Given some of the problems with the 4% rule that life expectancy and returns are unknown and that clients needs and the investing landscape will change overtime Blanchett said advisors should instead evaluate an appropriate withdrawal rate each year.
3. ANNUITY ALLOCATION
People are worried about outliving their money supply. A study from Allianz showed that 61% of people were more afraid of outliving their money than they were of dying, Blanchett said. Annuities are the only way to guarantee income for life.
But, he cautioned, don't think of an annuity as an investment. It's insurance and as such shouldnt be expected to have positive value, Blanchett told advisors.
Instead, advisors should have a holisitic perspective on how annuities contribute to the risk of a portfolio. Annuities become much more efficient when you think about it from a holisitic perspective, he said.
4. ASSET LOCATION AND WITHDRAWAL SOURCING
What sequence of withdrawal makes the most sense for an asset given its tax efficiency?Advisors can improve retirement income by managing asset location to reduce a client's tax payouts, Blanchett said.
If you have equities and bonds, and both taxable and tax-deferred accounts, "you don't want to be 50/50 in both accounts," he said. Because equity investments will be taxed at lower long-term capital gains rates, the most efficient strategy would be to allocate and withdraw stocks from a taxable account first, he pointed out.Its less efficient, for instance, to allocate and withdraw stock from an IRA first, he added.
5. LIABILITY-RELATIVE OPTIMIZATION
Unlike traditional asset allocation methodologies, a liability-relative optimized asset allocation strategy incorporates funding risks like inflation and currency, Blanchett explained. If inflation is high you want the portfolio to do well, if it is low, you dont need it to do as well.
For clients saving for retirement, Blanchett said, the real risk is not being able to pay for it.
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