As baby boomers pile into retirement, strategizing portfolio decumulation and addressing income needs is becoming their chief concern.
Yet new retirees are faced with a retirement industry that’s been focused on the accumulation and preservation of wealth, according to participants in “Show Me the Income,” a Tuesday panel discussion at the 2018 Morningstar Investment Conference in Chicago.
“We all enroll in a 401(k) and more often than not are put into a qualified default investment alternative,” said Wyatt Lee, portfolio manager and vice president at the Baltimore-based T. Rowe Price Group. “We ask, ‘What’s your retirement number?’ We actually need to train people that that should not be the objective. The objective should be the cash-flow stream.”
Lee, who works mostly with institutional intermediaries and 401(k) plan sponsors, said that meeting investors’ cash flow needs and income-paying securities are among the most common topics his clients ask him to address.
Lee said the demand for retirement income investment solutions manifests in two ways: one is in multi-asset solutions that use a blend of dividend payers, bonds and alternatives to generate income for clients, and the other is retirement plan sponsors who have prompted discussions about integrating income products into 401(k)s.
Such products are more common overseas than in the U.S., which has led a large contingent of do-it-yourself investors and a substantial number of advisors to craft income-focused portfolios of their own.
Morningstar’s Christine Benz, director of personal finance, began to focus on income-oriented investing strategies after her father-in-law announced one day that he wanted to fund his entire retirement cash flow needs with his portfolio using concentrated positions in high-yield products.
Benz argued that income-oriented strategies are usually too inflexible.
“There may be times when spending current income is the thing you want to do, but there may also be times where spending through rebalancing is a good idea. I think sourcing cash flows from trimming back positions is a great strategy,” said Benz. “I view the best source of cash flow as hiding in plain sight.”
Morningstar Investment Management, the asset management wing of the firm, has already compared income-focused investment strategies to those that derive cash flows from the total return of a portfolio by both taking yield and selling positions when income is needed, said Marta Norton, the unit's portfolio manager and head of U.S. outcome-based strategies.