A Russell Investments survey found that ensuring "reasonable spending" by clients was a top priority among advisors when serving those who are near or in retirement.
Russell Investments' latest Financial Professional Outlook survey of 234 financial advisors across the nation found that 52 percent said “setting reasonable spending expectations” was their top challenge in serving clients near or in retirement. This was followed by “maintaining sustainable plans” (44 percent), “determining sustainable spending policy” (33 percent) and “maintaining a scalable service model” (26 percent).
Twenty-five percent of advisors said they based their client’s retirement spending plan on pre-retirement spending patterns. This was followed by 22 percent who use the "4% rule" and 19 percent who use a time-segmented bucket strategy.
“Common approaches like the ‘4% rule’ are easy to understand, but do not account for a client’s individual circumstances and can lead to unintended mistakes,” said Rod Greenshields, consulting director for Russell’s advisor-sold business.
Only 16 percent of advisors polled used a funded ratio plan when designing a client’s retirement spending strategy.
A funded ratio plan determines the cost of a client’s liabilities compared to the value of their assets, according to Greenshields. The ratio relies on the client’s risk capacity, which is determined by how much risk their assets can handle rather than the client’s self-reported tolerance for investment risk. Once the ratio is calculated, “the outcome is a simple yet powerful percentage that most clients understand immediately,” he said.
“This individualized approach gives advisors the opportunity to engage with clients in a meaningful conversation about their progress toward retirement goals and the amount of risk they may need to take in order to meet them.”