The low interest-rate environment, market volatility and the risk that retirees may outlive their investments are among the challenges investment advisors face with their clients, and these are issues that are unlikely to go away.
And it’s important that investment advisors are able to help people fund their retirements since many are not investment-savvy enough to do it on their own. It becomes even more important when people get ready to retire, said Tina Wilson, senior vice president of retirement services product development at MassMutual Financial Group.
“When people are accumulating (assets), they may not have the awareness to make good decisions. When they’re ready to retire, they don’t have an idea of how to do it. It’s overwhelming,” Wilson said.
Charlie Bassignani, president and chief investment officer at Standard & Poor’s Investment Advisory Services, said people saving for retirement should maintain a well-diversified portfolio in order to reduce risk, with a substantial amount of the funds in moderately growing dividend-paying stocks. A modest amount should be allocated to Treasury Inflation-Protected Securities, convertible and high-yield bonds, and U.S. Treasury notes or municipal bonds, he said, adding that clients should defer taking Social Security.
Their outlook for inflation for the next 30 years is 2 percent to 3 percent annual increases, he said, as inflation drivers like global population and economic growth, climate change and the potential for political risk outside the U.S. are offset by technology-driven productivity gains, higher global industrial production, erosion of large firms controlling industrial and service prices, shale crude oil and gas capacity expansion and more alternative energy source development.
Brendan Murray, senior investment director of the global asset allocation group at Putnam, said investment advisors many want to look at portfolio diversification in a different light than the classic 60/40 portfolio split between stocks and bonds because of the higher volatility in equities.
“When put through a risk lens, a 60-40 portfolio has 90 percent equities risk … because equities are three to four more times volatile than bonds,” he said.
Putnam’s Absolute Return strategies help to lower volatility but keep returns the same, he said. Just 20 percent allocated to absolute return strategies helped to “significantly improve portfolio efficiency and diversification,” he said.
With a 7 percent return and 7 percent volatility, he said, a portfolio with an equal split between absolute return and the S&P 500 had an 85.6 percent chance of success for meeting goals versus a 7 percent return and 15 percent volatility for a traditional 60/40 portfolio, where there was a 67.2 percent chance of success.
Another tool can help investment advisors benchmark a client’s performance in income terms, said Ross Zvanor, head of business development for U.S. retirement at BlackRock.
The firm’s CoRi Retirement Indexes help to keep track of the estimated cost of $1 in the future to help predict lifetime income. The indexes help to put the cost of retirement in context, he said.
“If you have a 55-year-old with $1 million in savings, there’s no context. But if you say you’re on track to withdraw $64,000 a year, that’s now relatable,” Zvanor said.
The indexes can help to shift focus of retirement planning to lifetime income and give clients an idea of how much more they may need to save based on how much they want to draw down each year, he said.
While the new products may help investors into their retirement, Wilson said there is one thing no investment program can do.
“We cannot create a program that can overcome people not saving enough for retirement. We need to get to people sooner,” she said.