An Enhancement on the Theme of Asset Allocation
Among the greatest challenges advisors face is helping their clients choose -- and remain invested in -- the "right" asset allocation for them. Using separate accounts for the equity/fixed income allocations affords a different perspective on risk, placing it in a context that investors can more readily understand.
A client's initial retirement salary will be set at 4 percent to 6 percent of the overall portfolio value, based on the 4 percent safe withdrawal strategy and modified as needed for individual circumstances. Next, we ask clients to imagine how many years of safely stored retirement salary they need to alleviate their fears of market volatility. For some, six years of "safety net" is plenty. Others may prefer eight or 10 years of income reserve to confidently ride out stormy markets.
To the advisor, this can handily translate to an asset allocation of roughly 70/30 equity/fixed for a 5 percent, six-year reserve; or 50/50 equity/fixed for a 5 percent, 10-year reserve. But investors can more comfortably contemplate the same question in terms of years. When the talking heads on TV are crying that the sky is falling (again) he or she can clearly see that the next 6 years to 10 years of retirement income is protected in an account where the bottom line isn't getting smaller.
Assessing The Model
To confirm our assumptions, we conducted a behavioral survey of more than 40 highly affluent investors throughout 2009. Even with identical end returns, would participants respond differently to an aggregated, traditional 60/40 equity/fixed income account statement, versus a separated account strategy? We presented each model (in a variety of market conditions), and asked participants about their perceptions and preferences.
Most (88 percent) recognized performance to be the same or better within the separate account model.
Interestingly, even though underlying performance was the same, just over half perceived the separated account portfolios to have performed better.
Almost two-thirds indicated they felt better about their money with the separated accounts.
In other words, the data supported our intuition that retirees appreciate the clear view that the separate account structure affords them of a prudently modeled investment portfolio.
In our mind, perhaps the greatest dangers investors face in retirement is the inability to remain true to a carefully planned strategy that reflects their goals and their vision of what retirement means to them. At our firm, we devised our "Strategic Allocation for Income and Longevity," or SAIL program to address this concern. By seeking to deliver an overall financial experience that focuses on employing smart strategies in an understandable way, we believe retirees stand the best chance to keep their eyes on the horizon and avoid the motion sickness that near-view market volatility can otherwise so readily cause.
Grant Blindbury, CFP® is a partner at FMB Wealth Management, an independent RIA, in Westlake Village, Calif. His practice is focused on coordinating the advanced planning and longevity planning for early retirees. You can reach him at [email protected].