The slow-growth environment offers advisors an opportunity to further explore their clients’ risk capacity as they’re forced to look at riskier assets to generate returns.
“I find that presenting a lower return assumption uncovers a lot of intelligence surrounding my clients’ true gut feeling surrounding risk versus reward,” Milic said.
Milic is currently presenting clients with projected annual returns of 2.5 percent to 3 percent for bonds and total returns of 7 percent of equities over the next decad, but added that he might be underestimating stocks and overestimating fixed income.
The difficulty in planning around lower annual returns is compounded by increasing lifespans, said Milic.
“Most of us would probably conclude that we’re seeing this in our own practices: People are living well past the average life expectancy and into their 80s and 90s,” Milic said, adding that a higher allocation to equities generally means that a retirement portfolio could continue to grow and generate income if a client lives longer than they expect to.
With retirements lasting 30 or more years, a higher equity allocation also helps address inflation risk, said Yeske.
“The cost of living might double twice over the course of someone’s retirement,” Yeske said. “They’d better have some growth in that portfolio.”
Milic said he was currently planning retirement portfolios for life expectancies of 100 years old, but wondered if advisors should start planning for lives beyond the centenarian mark.
Blanchett, on the other hand, warned that factoring in too much longevity could lead to undesired results.
“If we’re running retirement projections for age 100 with a 95 percent success rate, we’re going to be planning very expensive retirements for clients,” Blanchett said. “You need reasonable expectations, but don’t be too conservative.”