A few years ago, the Principal Financial Group published a white paper comparing two of the most popular retirement income strategies: systematic withdrawals and the bucket strategy. The paper found that a bucket strategy, which assigns a different pot of money to a defined time period based upon a retiree's risk tolerance and time horizon, may provide psychological benefits to clients.
By linking smaller amounts of money to specific goals — such as cash for immediate liquidity, bonds or period-certain annuities for short-term income needs and equities for growth and future income — clients may be more comfortable with their overall retirement income plan. It may also help extremely risk-averse clients take a more long-term approach to investing when their riskiest investments are tied to their furthest time horizon.
In contrast, the paper found that a systematic withdrawal approach used by the majority of financial advisers may feel overwhelming to some retirees. Typically, an adviser may tap 4% of the initial value of the client's nest egg the first year and increase subsequent annual withdrawals to account for inflation. Although the systematic withdrawal approach is easier for advisers to execute, viewing the total account balance can make clients nervous, leading to more dramatic overreaction when account balances dip due to market volatility, the paper found.
Now there is a new software program that takes the headache out of managing a segmented bucket strategy, letting both financial advisers and their clients sleep better at night.
The IncomeConductor platform from 3D Asset Management monitors the performance of each of the buckets and calculates whether specific investments need to be adjusted to create sufficient retirement income now and in the future. It is part of the WealthConductor program that provides adviser training, marketing, technology and practice management support to help advisers capture a slice of the growing retirement income planning market.
In a recent webcast, 3D's national sales manager Steve McCoy discussed how the IncomeConductor technology platform allows advisers to track various banking, insurance and investment accounts, regardless of location. The program can aggregate single or multiple accounts into the appropriate time-segmentation bucket.
USE BY ADVISERS
Advisers can use IncomeConductor to manage clients' retirement plans, too. The program analyzes the performance of the individual segments and provides guidance for modifying investment strategies based on actual market performance and/or changes in retirees needs along the way. Finally, it wraps up all the information into client-friendly reports that have received a clean review for the Financial Industry Regulatory Authority Inc.
IncomeConductor generates retirement income policy statements that clients must sign at each step of the process, from initial agreement to plan modifications. The unique client-signoff requirement provides bulletproof documentation for compliance reviews.
The program is the brainchild of Phil Lubinski, president of the Strategic Distribution Institute in Denver, who pioneered the segmented methodology more than 30 years ago in his financial planning practice. He worked with Sheryl O'Connor, chief operations officer at 3D Asset Management, to develop what he calls the “next evolution” of his signature retirement income strategy, which can include up to 10 segments of any length.
Several investment companies have criticized Mr. Lubinski's segmented strategy, charging that it leaves retirees too exposed to equities after liquidating their conservative holdings at the beginning of retirement. But his philosophy was validated in a recent research paper authored by Wade Pfau, professor of retirement income at The American College, and Michael Kitces, partner and director of research at Pinnacle Advisory Group.
The paper, “Reducing Retirement Risk with a Rising Equity Glidepath,” found portfolios that become more aggressive through retirement have the potential to reduce both the probability and magnitude of failure. 3D's moderate-income plan starts with a 30% equity allocation and rises to 80% by the end of retirement.
“In scenarios that threaten retirement sustainability — such as an extended period of poor returns in the first half of retirement — a declining equity exposure over time will lead the retiree to have the least in stocks if/when the good returns finally show up in the second half of retirement,” they wrote. “The optimal equity exposure for a portfolio over an accumulation/ decumulation lifetime may look less like a slow and steady downward slope and more like the letter U in which the stock allocation is the lowest at the point when retirement begins and continues to increase as the retiree ages.”
Mr. Pfau and Mr. Kitces challenged the financial planning community to rethink the traditional retirement income glidepath. If you subscribe to the bucket strategy concept of starting with a lower equity exposure than has traditionally been used and increasing it over time, now there is a new tool that can help you better execute your clients' retirement income plans.
(Questions about Social Security? Find the answers in my e-book at InvestmentNews.com/MBFebook.)