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Russell Investments has released a research paper – "Adaptive Investing: A responsive approach to managing retirement assets" – which focuses on the application of patent-pending Adaptive Investing methodology to manage retirement income portfolios. The paper, authored by Sam Pittman, Ph.D., and Rod Greenshields, CFA, is aimed at financial advisors who are helping individual clients meet their retirement income needs.
"Retirees want consistent income from their portfolios and to avoid running out of money before they die," said Sam Pittman, a senior research analyst at Russell. "They also want to maintain control of their assets for as long as possible. In fact, many would like to be able to bequeath any remaining assets to heirs or charitable organizations. The Russell Adaptive Investing™ framework supports these aspirations by simultaneously helping investors retain control of their assets for as long as possible, while working to address the real risk of outliving assets by preserving the option to annuitize if it is needed."
The first step: comparing assets to liabilities and creating a funded ratio
Russell asserts that the first step an advisor should take when constructing a retirement plan is to compare the size of an investor's assets (investments and future savings) to his or her liabilities (debt and future spending needs). By taking the ratio of assets to liabilities and arriving at an investor's funded ratio, an advisor can help that retiree make informed decisions regarding how much he or she might spend and overall readiness for retirement. The funded ratio is a guidepost for spending, asset allocation and insurance decisions.
"Advisors play a critical role in helping their clients meet retirement income goals. Russell's Adaptive Investing approach relies on the investor's advisor keeping a close eye not only on their client's portfolio but equally important, on their spending plans," said Rod Greenshields, consulting director, U.S. private client consulting group, in Russell's advisor-sold business.
Asset-only view of retirement portfolio allocation versus the asset-liability model
According to the paper, what is unique about this approach is that using a funded ratio shifts focus from an asset-only view of portfolio management to a more complete view considering assets and liabilities. In this type of asset-liability framework, the asset allocation is guided by the wealth, spending needs and the lifespan of an investor.
Mitigating longevity risk
A primary goal of adaptive investing is to achieve income sustainability for life without initially having to buy an annuity. Rather than purchase an annuity at the outset, the retirement portfolio is managed so that an investor maintains the option to purchase an annuity later.
"Many planning approaches try to mitigate longevity risk by planning to a fixed age that is either at or beyond the life expectancy, but there is still a chance the client may live past the selected ending age. What's more, using a pre-determined ending age can lead to an overly restrictive spending plan if the age is set too high and an overly risky plan if the age is set too low," said Greenshields. "Under this framework, investors can preserve flexibility and keep their options open as there is always the option to buy an annuity if it is needed."
