When it comes to retirement income, conventional wisdom holds that an annual withdrawal rate of 4% from a nest egg—give or take a few basis points and adjusted as needed—should help retirees to not outlive their financial resources. The folks at Russell Investments believe that approach is too simplistic, in large part because planning for longevity is a crapshoot. Anticipating a predetermined end date that’s decades into the future can result in an overly restrictive spending plan. On the flip side, aiming too low on people’s potential life span puts their finances at risk.

“Given the number of variables that go into determining what a sustainable withdrawal rate should be, any rule of thumb is bound to fall short,” says Phill Rogerson, managing director of consulting at Russell Investments in Seattle. “In particular, some of the primary determinants of a sustainable withdrawal rate are things such as an investor’s age, their expected life span or amount of longevity risk, and the prevailing interest rate environment, all of which would be largely ignored in any rule-of-thumb approach.”

Or, as Russell Investments put it in a January 2014 report focused on a concept it calls “adaptive investing,” “Retirees want low risk of outliving their assets (sustainability), consistent income (predictability) and financial liquidity (flexibility). Given this, investment advice needs to be delivered within a framework linked more explicitly to these preferences.”

Russell’s solution is based on the funded ratio, which is a simple measure of assets to liabilities. This ratio, Russell says, not only shows whether an individual has enough wealth to support his or her desired retirement lifestyle, but also can help determine asset allocation decisions and whether an investor needs an immediate life annuity as an insurance policy against running out of money during retirement.

Assets can include income assets such as Social Security and pensions, along with portfolio assets. Liabilities need to be covered by these assets. Ideally, there should be a positive surplus, or a funded ratio greater than 100%, after dividing assets by liabilities. If there is, the individual can take on more market risk with his or her portfolio, depending on the size of the surplus and the person’s age. If the funded ratio is at or approaching a negative surplus, or less than 100%, the investor will have problems meeting spending needs and should adjust the game plan accordingly.

“What we’ve tried to do is provide an answer to two very straightforward questions,” Rogerson says. “One, what is a sustainable withdrawal rate, or do I currently have a sustainable withdrawal rate? And two, what is the optimal investment strategy to help maintain that withdrawal rate?”

In simple terms, Russell’s planning method starts with a 10-year period of certain cash-flow payments. Rogerson says 10 years is far enough into the future to provide a reasonable planning time frame without trying to predict future events. “We know things can come up to change the circumstances,” he says. “But by having this be a calculation, an advisor can change as circumstances arise and can discuss with a client the implications of those changes.”

After accounting for cash flows over the next 10 years, the next step is to target a minimum wealth level at the end of those 10 years that exceeds the cost of future liabilities. The goal is to create a funded ratio greater than 100%, and in doing so address longevity risk by developing a sustainable investment plan without having to buy an immediate life annuity.

As stated in Russell’s report, “Most would agree that the allocation of a retiree would depend on their age and withdrawal rate; adaptive asset allocation makes this connection while also responding as the investor’s situation changes through time. These responses—or adaptations—reduce risk and increase the expected ending wealth.”

One of the aims of Russell’s methodology is to provide retirees with the flexibility to control their assets for as long as possible—in other words, whether or not they want to stay in the markets. So while buying an immediate life annuity can be a viable choice depending on the circumstances, Rogerson says committing to an annuity too soon in retirement reduces a person’s options.

“If the funded ratio declines to a point close to 100%, then it’s time to assess if you want to continue your exposure to market risk and the inherent longevity risk, or whether you want to lock yourself into the annuity,” Rogerson says.

“We see the idea of calculating a funded ratio as a way for the advisor to have a legitimate basis for the advice they’re giving to investors and to have an intelligent conversation about the trade-offs an investor can reasonably make in terms of having a greater lifestyle now versus minimizing the probability they’ll run out of money before they die,” he adds.

Rogerson says Russell began working on its adaptive investing framework in 2007, and in recent years has been taking its message to broker-dealers, the home offices of national investment advisory firms and, starting last year, directly to financial advisors.

“On the one hand, we get an enormous amount of positive feedback from advisors and industry commentators as a whole,” Rogerson says. “But the challenge we’ve had is getting this approach to be more broadly adopted. There are a lot of newer and complex concepts associated with this approach, and it has been really appealing to early adopters who’ve spent time thinking about these issues. But it’s a challenge for us to make this new approach more accepted in the mainstream.”