Can Retirement Income Be Modernized? A Guide for Financial Advisors

Just one of these scenarios likely would be enough to cause concern for an investor:

• Potential end of the post-Global Financial Crisis secular bull market in equities
• Prospect of the first sustained rising U.S. interest rate environment in more than 40 years
• Highest inflation level in four decades

Yet in 2022, we’re facing all three at once. It’s a potentially catastrophic combination, especially for investors nearing or in the early years of retirement.

In my opinion, this is a “perfect storm” (yes, I know that’s a super cliché saying – even I cringed when typing it). And it demonstrates how the need for a more modern approach to retirement income has never been greater. It also motivated my colleague, Brandon Langley, and I to embark on a research project into different approaches to sustaining clients throughout retirement. Today, we’ve released our findings in a new white paper available to financial advisors, “An Advisor’s Guide to Protecting Retirement Income.”

The 60/40 Problem is the Guide’s Origin Story

A 60/40 portfolio has been the bread-and-butter strategy that helped millions of investors retire comfortably in the past, and to varying degrees it remains the foundation upon which many of the traditional approaches to retirement accounts continue to be built.

On the other hand, many in the investment industry have steadily come to the realization that we are facing a 60/40 problem, and the usual methods may not be capable of allowing the next generation to also retire well.

Over the years, new philosophies and strategies have been developed that attempt to enhance retirement income, with many focused on adjusting investor behavior in terms of withdrawal rates, addressing sequence of returns risk, or both. While these tools may be beneficial from time to time, I think a shortcoming is that few emphasize management of the portfolio itself as a tool for enhancing retirement income. Additionally, many of these strategies rely on past market behavior and correlations that likely won’t manifest going forward.

A related drawback associated with each of the historically preferred methods of protecting retirement income is that they aren’t very dynamic. This puts them at odds with the market, which is characterized by constant change. Target-date funds, balanced portfolios, and even the bucket system are somewhat adaptive in that they adjust as an investor gets closer to and progresses through retirement, but their modifications are driven by a human factor (age), not the market environment.

An alternative is to create a dynamic glidepath that is adaptive, with the adjustments driven by what’s happening in the market at any particular time irrespective of the investor’s age or retirement year. A dynamic portfolio can dramatically adjust its allocations with the goal of continually taking advantage of strong-performing asset classes while also minimizing exposure to those showing weakness. This means the portfolio can look dramatically different depending on the market conditions at the time of and throughout retirement.

Attacking Sequence of Returns Risk

“An Advisor’s Guide to Retirement Income” considers whether the more dynamic glidepath approach warrants further attention from financial advisors. To analyze the matter, Brandon and I:

• Considered what’s at stake for investors who are in or nearing retirement
• Addressed the primary considerations for financial advisors and their clients, including withdrawal rate, sequence of returns risk, inflation, life expectancy, and suitability
• Reviewed the historically preferred methods for protecting retirement income
• Analyzed data that compares the performance of a traditional glidepath portfolio to a dynamic glidepath alternative
• Conducted a longer-term stress test of the traditional versus dynamic glidepath portfolios by reviewing data about the best and worst times to retire since 1928

In summary, we believe the data showed that the dynamic glidepath approach improved the odds of success thus far in the 21st century, which has included two prolonged bear markets along with multiple favorable periods. Even during the more extended timeline since 1928, the strategy held up well during extreme conditions.

Additional Resources for Financial Advisors

In addition to “An Advisor’s Guide to Protecting Retirement Income,” we compiled a set of companion materials. The Retirement Income Materials for Advisors Package includes education pieces to help advisors have conversation with their clients about the importance of protecting retirement income and strategies for achieving that objective.

We’re also hosting a 45-minute webinar, “Reconsidering Retirement Income in the Face of a Broken 60/40,” Wednesday, October 19 at 11 a.m. ET. Financial professionals can register here.

Lastly, we welcome to opportunity speak with you about our research, the findings, or how to use the Guide and Materials for Advisors Package. Please reach out anytime.

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Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.

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