Ray Lucas, the senior vice president of financial planning at Integrated Partners, explains how creating retirement income that lasts a lifetime is the crux of a solid financial planning relationship.
Russ Alan Prince: What is the struggle for advisors at the intersection of retirement planning and delivering lifetime income?
Ray Lucas: I believe the hardest struggle for advisors to grasp is how to handle the “sequence of returns” risk that is technically not an issue in the accumulation years but is a huge issue in the distribution—retirement—years. Sequence of returns risk occurs when, as a retiree, you are still relying on the long-term growth of your portfolio to provide retirement income. Still, the timing of a client’s retirement income withdrawals from volatile positions can have short-term and, more importantly, long-term consequences to your ultimate success in achieving your retirement goals.
Prince: What is the Lifetime Income Model?
Lucas: The Lifetime Income Model is our methodology and approach to provide the highest probability of achieving your retirement income goals and objectives while addressing head-on the biggest issue retirees and their advisors face, which is the sequence of returns risk.
Prince: How does it work?
Lucas: Instead of managing a client’s portfolio like one singular large portfolio, the Lifetime Income Model breaks a client’s portfolio into a series of sleeves or segments, which are not based upon a client’s chronological age but rather based on how long the client’s money is available to work on their behalf before they need to take withdrawals from that sleeve.
For example, for the money you need right away—that is, in the next five years—that money is set aside in conservative accounts since this is going to be the money you live on for the next five years. Conversely, if we identify a segment that we know your client should not have to touch for 15 to 20 or more years, that can be invested more aggressively than the first sleeve.
Prince: Why would anyone use this?
Lucas: There are two big reasons I see in utilizing this process. For the monies that have at least 10 or more years to grow for the benefit of your client, the client will take advantage of the most important ally an investor can have when investing, and that is time. You can invest more aggressively because the more aggressive asset classes now have the time—10, 15, 20+ years—to work on your behalf before you need to access any funds from these segments.
Not only does the investment logic make sense, but it is a wonderful behavioral finance tool. Suppose a client knows they have anywhere from five to 10 years of conservatively invested assets to live on. In that case, then if and when, there is a market downturn, it is easier to ride out the downturn because they have enough money set aside to live on while the markets recover, preventing the client from making the worst mistake they can make, which is making an emotional investment decision to sell at the worst time, which could permanently impair their ability to achieve their retirement income goals.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.
