Often, the first thought is to increase portfolio risk to increase the PFR in the future. After extensive analytical work, tying asset allocations to economic forecasts, current PFRs and stage of financial life of the client, we can comfortably say two things. First, this might not be the best course of action under many scenarios from a probability-of-success standpoint. And second, portfolio risk is just that—risk. Increasing the riskiness of a portfolio in no way guarantees that returns will follow. Spending, on the other hand, is a powerful lever, which is why we focus on separating essential from discretionary expenditures.
One way we explain a particular client’s financial position—only when specific circumstances warrant—is to explain the “elasticity” of a client’s PFR.
The easiest way to frame this discussion is with Figure 2.
We suggest that additional reports, such as attribution reports for changing elements of the PFR, be used sparingly. They are created for service teams to understand the underlying realities of a client’s circumstances. But our tendency to believe that more is better can often reduce the effectiveness of communication and any necessary call to action. Do you share that tendency?
As stated above, we believe the PFR can serve as a current reality check on retirement readiness or financial independence generally. After deep goal discovery and understanding of a client’s phase of financial life, a portfolio designed to give the best odds of improving the client’s PFR—with powerful shortfall functions to penalize the opposite result—can be tested as well with MCS. Ongoing reporting that shifts the primary focus from relative market returns to overall resources and claims—the PFR—can help clients better navigate complicated financial lives. And finally, a decumulation strategy that incorporates the PFR into calculations for annual distribution amounts can help to maximize lifetime spending while protecting against running out of money.