Select a profile for talking points on how to help your clients adjust to meet their retirement spending goals.
A client in the Red Zone needs to clearly understand that the market downturn may have created a large gap between their planned retirement spending and what they can sustain. As such, they may face a very serious risk and must take action with regard to their stated goals.
On the basis of the analysis from the Client analyzer, this client is in the Red Zone.
Retired investors who are in the Red Zone have less than a 70% chance of reaching their desired income goal during retirement with a diversified portfolio1.
These clients need to clearly understand that the market downturn may have created a large gap between their planned retirement spending and what they can sustain.
As such, they may face a very serious risk and must take action with regard to their stated goals.
Discuss the need to make tough decisions as soon as possible to alter their goals. The tone of these conversations is less about what they may be considering and more about what they must do.
These potential actions represent only some of the possibilities investors can choose to manage their retirement plan.
Consider the availability and order of the levers. For example, discuss whether or not the client can resume full-time or part-time work, or spend less and what is the potential impact. If your client is able and willing to work part time for a few years, this supplemental income stream may give them a higher probability of meeting their retirement goals without further spending reductions.
These clients must take action in order to make up their investment shortfall, and they should aim to pull as many levers as necessary to address this deficit. Instead of having a conversation about desired spending goals, focus the discussion on planning for their more basic needs. Spending less during retirement can have a dramatic impact on their potential ending wealth.
Follow a detailed client engagement road map to closely monitor the impact of market changes on portfolio value, ability to reduce or defer spending, the effect of additional income from re-entering the workforce, and any other material changes to personal situations.
For a deeper understanding of how to salvage these retirement plans, it may help to run a more detailed cash-flow analysis in a planning tool with current portfolio values as a base plan. You can create a plan focused on needs first, to determine the potential impact of different asset-allocation options; or based on risk tolerance to assess the feasibility of their spending goals. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three to create a viable alternative plan. Then regularly monitor plan status based on changes to circumstances or general market changes. Re-evaluate the plan if the value of the portfolio changes significantly and/or the client re-enters the workforce.
A client in the Orange Zone faces a material risk of not maintaining their retirement lifestyle. They should take action and understand the potential impact of the available levers on the success of their retirement goals.
On the basis of the analysis from the Client analyzer, this client is in the Orange Zone.
Retired investors who are in the Orange Zone have only a 70%–80% probability of meeting their spending goals in retirement with a diversified portfolio1. This means they could be at risk of having insufficient assets to meet their future desired spending goals, and they face a material risk of not maintaining their retirement lifestyle.
Since they are no longer working full-time, they may need to rely more heavily on the Spending Lever to improve their funding status.
Investors in this zone should take action and understand the potential impact of the available levers on the success of their retirement goals.
These potential actions represent only some of the possibilities an investor could choose to manage their retirement plan.
Investors in the Orange Zone need to clearly understand the material gap between their retirement spending plans and what is prudently sustainable. They may have less flexibility with their portfolio since they have less of a wealth cushion, which means they should first take advantage of other options to improve their plan's potential for success.
Given the timing of the market decline in light of their retired status, these clients may wonder about the impact on their portfolio. You can help address which levers to pull and how hard they should be pulled.
For these clients, conversations should focus on the benefit of making tough decisions now, while there may be greater flexibility. Keep in mind, the longterm impact those decisions can make on achieving their desired lifestyle. These conversations should be less about what they may ideally want and more about the choices they need to make.
Follow-up conversations and priorities will depend on the availability of specific levers (i.e., can they adopt part-time work or spend less), along with the potential impact of each decision. For example, if your client is able and willing to work part time for a few years, this extra income may give them a higher probability of meeting their retirement goals without drastically reducing spending.
To be prudent, these clients should take action to make up their investment shortfall by pulling the available levers as necessary. Instead of having a conversation about desired spending goals, focus the discussion on planning for their more basic needs.
If returning to work isn't possible or palatable, investors in this group will need to spend less now, as well as during part or all of retirement. Spending less during retirement can have a dramatic impact on potential ending wealth.
Follow a detailed client engagement road map to closely monitor the impact of market changes on portfolio value, ability to reduce or defer spending, the effect of additional income from re-entering the workforce, and any other material changes to personal situations.
For additional assurance, it might help to run a more detailed cash-flow analysis in a planning tool with current portfolio values as a base plan. You can create a plan focused on needs first, to determine the potential impact of different assetallocation options; or based on risk tolerance, to assess the feasibility of their spending goals. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three to increase the viability of the plan.
With their prime savings years behind them, clients in the Yellow Zone may have less flexibility with their portfolio because they have a smaller wealth cushion. They should consider using other mechanisms or levers to improve the potential for success of their plan.
On the basis of the analysis from the Client analyzer, this client is in the Yellow Zone.
Retired investors who are in the Yellow Zone may have a 80%–90% chance of meeting their desired spending goals in retirement with a diversified portfolio1. They face a moderate risk of not meeting their expected retirement lifestyle.
With their prime savings years behind them, they may also have less flexibility with their portfolio because they have a smaller wealth cushion. Therefore, they should consider using other mechanisms or levers to improve the potential for success of their plan.
These potential actions represent only some of the possibilities investors can choose to manage their retirement plan.
Since these clients have a moderate probability of meeting their stated goals, discuss actions they could consider taking to increase their comfort level.
While the market may not have affected their future plans as much as they think, any sacrifices they make to reduce their retirement lifestyle choices could further improve their chances of achieving their goals. Focus on managing the things they can control.
Clients in this category face a choice between (1) holding to the current plan, which could improve or degrade with market movements, or (2) making adjustments to further manage their risk. Using the Spending Lever and the Income Lever could constrain their lifestyle to some extent, but these actions offer the most control. Every dollar saved is one that can remain in the portfolio for future spending needs.
Follow a detailed client engagement road map to closely monitor the impact of market changes on portfolio value, their ability to reduce or defer spending, the effect of additional income if they re-enter the workforce, and any other material changes to personal situations.
For additional assurance, it may be helpful to run a more detailed cash-flow analysis in a planning tool with current portfolio values as a base plan. You can create a plan focused on needs first, to determine the potential impact of different assetallocation options; or based on risk tolerance, to assess the feasibility of their spending goals. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three to further increase the viability of the plan.
A client in the Green Zone is likely in a solid financial position and can more confidently stay the course with their plan. While there is still a chance that future market changes could make the current plan unsustainable, they need to make few, if any, adjustments to their planned retirement date or spending patterns at this time.
On the basis of the analysis from the Client analyzer, this client is in the Green Zone.
Retired investors in the Green Zone have a high probability (greater than 90%) of achieving their desired spending goals in retirement with a diversified portfolio1, despite the impact of the current market downturn.
These clients can more confidently stay the course with their current plans. While there is still a chance that future market changes could make the current plan unsustainable, they need to make few, if any, adjustments to their planned retirement date or spending patterns at this time.
For investors in Green Zone, it may not be necessary to take action immediately. However, they may want to consider the following to further improve the probability of meeting their goals. (Note that for retired clients, the Spending Lever likely comes before the Income Lever in terms of priority.)
These potential actions represent only some of the possibilities investors can choose to manage their retirement plan.
Investors in the Green Zone should feel a sense of security because there is a high probability of success with their plan.
Compared to most investors, they have flexibility regarding the levers they can pull if they so choose. Despite their relatively solid status, if they find the current market unsettling, they may find relief in considering ways to further manage risk. They could simply view these alternatives as emergency options.
Follow a detailed client engagement road map to monitor the impact of market changes on portfolio value, as well as any material changes to personal situations.
While these clients may have a high calculated probability of meeting their stated goals, they could be at their risk tolerance threshold. In such a situation, they may be better off than they feel. The goal of this exercise is to help these clients better understand the reality of their situation.
For a deeper understanding of the viability of their ongoing retirement-spending plans and estate goals, it may be helpful to run a more detailed cash-flow analysis in a planning tool. You can create a plan focused on needs first, to determine the potential impact of different asset-allocation options; or based on risk tolerance, to assess the feasibility of their spending goals. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three.
Select a profile for help talking about the impact of the market downturn on your clients' retirement goals.
A client in the Red Zone may have a large gap between their planned retirement spending and what is actually sustainable. They may face a very serious risk and must take action with regard to their stated goals. Fortunately, their current participation in the workforce may offer flexibility.
On the basis of the analysis from the Client analyzer, this client is in the Red Zone.
Investors who are near retirement and in the Red Zone have less than a 70% probability of achieving their spending goals in retirement with a diversified portfolio1. They probably have a large asset deficit relative to their future expected spending needs, and they may face a very high risk of not achieving their expected retirement lifestyle.
Clients in the Red Zone need to clearly understand that the market impact may have resulted in a large gap between their planned retirement spending and what is actually sustainable.
These clients may face a very serious risk and must take action with regard to their stated goals.
Fortunately, their current participation in the workforce may offer some flexibility.
These potential actions represent only some of the possibilities investors can choose to manage their retirement plan.
Investors in the Red Zone need to understand the gap between their planned retirement and what is now possible. They may have less flexibility with their portfolio because they have less of a wealth cushion, which means they should first take advantage of other options to improve their plan's potential for success.
For these clients, conversations should focus on the need to make tough decisions and the potential flexibility they have with their stated goals. The tone of these conversations should be less about what they may be considering and more about what they must do.
Discuss client priorities and available levers. Delaying retirement as long as possible, as well as increasing savings rates could help resolve their investment shortfall. If not, discuss essential retirement income needs. Again, instead of having a conversation about retirement lifestyle, talk about the clients' base needs or income floor.
Consider the order of the levers. If the Income Lever is not available or palatable, clients will need to spend less now, as well as during part or all of retirement. If it is possible to spend less now, savings will grow for the next three years. More importantly, spending less during retirement life can have a dramatic impact on potential ending wealth. The potential impact on their plan depends on how far they can pull each lever.
Follow a detailed client engagement road map to closely monitor the impact of market changes on portfolio value, the ability to reduce or defer spending, the effect of additional income from continued work, and any other material changes to personal situations. You will also need to help manage expectations regarding a future retirement date, since it could take time to build enough wealth to make that date financially feasible.
For a deeper understanding of what it could take to salvage clients' retirement plans, it may help to run a more detailed cash-flow analysis in a planning tool with current portfolio values as a base plan. You can create a plan focused on needs first, to determine the potential impact of different asset-allocation options; or based on risk tolerance, to assess the feasibility of their spending goals. In this case, the focus will be on either a longer savings horizon due to delaying retirement, or determining the necessary income floor for the investor if a delayed retirement is not possible. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three to create an alternative plan.
A client in the Orange Zone can be at significant risk of not having sufficient assets relative to their future expected spending needs and may not be able to achieve their expected lifestyle in retirement. Investors in this zone will be well served by acting now.
On the basis of the analysis from the Client analyzer, this client is in the Orange Zone.
Investors who are near retirement and in the Orange Zone have a 70%–80% probability of meeting their spending goals in retirement with a diversified portfolio1.
This means they could be at significant risk of not having sufficient assets to meet their future expected spending needs, and they may not be able to achieve their expected retirement lifestyle.
Investors in this zone really must act now. Fortunately, their current participation in the workforce may offer a margin of flexibility.
These potential actions represent only some of the possibilities investors can choose to manage their retirement plan.
Given the timing of the market decline relative to their desired retirement date, these clients may be at risk before they enter retirement. They should reassess their goals and understand the potentially great impact of using the available levers to adjust their plan. The question is not whether they should pull a lever, but which one, or which combination of levers should be used.
Investors in the Orange Zone need to clearly understand that there could be a material gap between their desired retirement plans and what is financially sustainable.
Conversations should be about the benefit of making tough decisions now, while there is greater flexibility, and the long-term impact of those decisions. The tone of these conversations is typically less about what clients may ideally want and more about the choices they need to make.
To be prudent, these clients should make up their shortfall by pulling the necessary levers. Delaying retirement as long as possible combined with increasing savings could quickly resolve shortfall. If they are not able or unwilling to make these adjustments, then your conversation with them should center on reducing spending. Spending less over their retirement life can have a dramatic impact on their potential ending wealth. Focus on each client's minimum retirement-income requirements and how they will meet those needs.
Follow a detailed client engagement road map to closely monitor the impact of market changes on portfolio value, ability to reduce or defer spending, the effect of additional income from continuing to work as long as possible, and any other material changes to personal situations. You'll also need to help manage expectations regarding a future retirement date, since it could take time to build enough wealth to make that date financially feasible.
For a deeper understanding of what it could take to salvage clients' retirement plans, it might help to run a more detailed cash-flow analysis in a planning tool using current portfolio values as a base plan. You can create a plan focused on needs first, to determine the potential impact of different asset-allocation options; or based on risk tolerance, to assess the feasibility of their spending goals. For example, if the client is able to delay retirement for three years, this affects both the savings rate and the withdrawals they expected to take during the next three years. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three to create a viable alternative plan.
A client in the Yellow Zone faces a moderate risk of not fulfilling their lifestyle expectations in retirement. Their current participation in the workforce provides them with more options to improve the status of their plan and further mitigate this risk.
On the basis of the analysis from the Client analyzer, this client is in the Yellow Zone.
Investors who are near retirement and in the Yellow Zone have an 80%–90% chance of meeting their desired retirement-spending goals with a diversified portfolio1. Thus, they face a moderate risk of not fulfilling their expected retirement lifestyle.
Additionally, their current participation in the workforce provides even more options for improving the status of their retirement-spending plan.
Although investors in the Yellow Zone face only moderate risk, they might further mitigate this risk by considering some of the following actions.
These potential actions represent only some of the possibilities investors can choose to manage their retirement plan.
Investors in the Yellow Zone should understand that while their plans have a reasonable probability of success, success is not assured, and some shortterm adjustments could improve their sense of long-term security.
Given the timing of the current market decline relative to their desired retirement dates, these investors know their portfolio may have been affected. Depending on their available assets and income needs, they may or may not be as affected as they think. Compared to many investors, they may have more flexibility. If they are still very nervous about the impact of future market downturns on their retirement plans, it may be a good idea to use the Income and Spending Levers to improve their sense of security.
Conversations should be about making modest sacrifices now, while there is greater flexibility, in order to improve their opportunity to meet their long-term goals. The tone of these conversations is about the choices they face.
The next step is to discuss priorities and the impact of each lever. For example, if your clients in this zone are able and willing to work longer than originally planned, this income stream combined with an increased savings rate will likely offer them a higher probability of meeting their retirement goals without reducing spending during retirement.
Consider the order of the levers. If the Income Lever is not available or palatable, these investors may need to spend less now, as well as adjust their spending expectations during part or all of retirement. If it is possible to spend less now, they'll increase savings for the short term. More importantly, spending less in retirement can have a dramatic impact on their potential ending wealth. The potential impact on their plan depends on how far they can pull each lever, for example, how much they can reduce spending and increase savings.
Monitor the impact of market changes on portfolio value, measure willingness to reduce or defer spending, calculate the effect of additional income from remaining in the workforce longer, and include any other material changes to personal situations.
For a deeper understanding of the available choices and their potential consequences, it may be helpful to run a more detailed cash-flow analysis in a planning tool using current portfolio values as a base plan. You can create a plan focused on needs first, to determine the potential impact of different asset-allocation options; or based on risk tolerance, to assess the feasibility of their spending goals. For example, you could illustrate the impact of reducing spending during the first three years of retirement as compared to reducing spending during all of retirement. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three to create a viable alternative plan.
A client in the Green Zone is likely in a sound financial position. While there is still a chance that future market changes could make their current plan unsustainable, they need to make few, if any, adjustments at this time.
On the basis of the analysis from the Client analyzer, this investor is in the Green Zone.
Investors who are near retirement and in the Green Zone have a very high probability (greater than 90%) of achieving their expected retirement lifestyle with a diversified portfolio1, despite the impact of the current market downturn.
These clients can more confidently stay the course. While there is still a chance that future market changes could make their current plan unsustainable, they need to make few, if any, adjustments now to their planned retirement date or spending patterns.
For investors in the Green Zone, immediate action may not be necessary. However, they may want to consider the following suggestions to further improve their chances of meeting their goals.
These potential actions represent only some of the possibilities investors can choose to manage their retirement plan.
Investors in the Green Zone should feel a sense of security because there is a high probability of success with their plan.
While this analysis shows these clients are on track to meet their goals, they could be at the threshold of their risk tolerance. If so, they are probably better off than they feel, so your goal as their advisor is to help these clients better understand their situation.
Compared to most investors, these Green Zone clients have a great deal of flexibility. Despite their relatively solid status, if they find the current market unsettling, they may find relief in considering ways to further manage risk. They could simply view these alternatives as emergency options.
Monitor the impact of market changes on the value of their portfolio, as well as any material changes to their personal situation.
For a deeper understanding of the viability of their retirement-spending plans and estate goals, it may be helpful to run a more detailed cash-flow analysis in a planning tool. You can create a plan focused on needs first, to determine the potential impact of different asset-allocation options; or based on risk tolerance, to assess the feasibility of their spending goals. Utilize Monte Carlo projections to illustrate potential ending wealth ranges. On the basis of the outcome, consider adjusting desired income (withdrawals), savings rate (contributions), portfolio allocations, or some combination of all three.
1 When determining probabilities of success and corresponding color zones for portfolio, the Client Analyzer models portfolios ranging from 20% Equity and 80% Fixed Income to 80% Equity and 20% Fixed Income. Each portfolio is assumed to be broadly diversified at both the asset class and security levels.
The Client Analyzer application used to help determine which of the advice profiles most closely approximates a client's situation relies on various statistical and modeling techniques, including Monte Carlo simulation (Methodology & Limitations), to produce hypothetical projections. The projections or other information generated by the Client Analyzer regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.
Monte Carlo Simulation generates a broad range of hypothetical investments scenarios designed to better reflect the actual volatility and randomness of the financial markets which are not fully addressed by using simple average return assumptions. In this approach, each scenario randomly models one potential investment path containing a string of positive or negative, small-to-large hypothetical investment returns.
The modeling used by the Client Analyzer considers 5,000 scenarios for each year simulated. These simulations model investment performance for a set of asset classes to estimate how each might impact a portfolio over a specified time period. These simulations are designed to reflect the forecasted volatility of investment markets and other economic variables. This analysis is not meant to serve as a direct prediction regarding the future performance of your clients' investments or the income and capital gains that they might produce. Similarly, it is not intended to predict or guarantee future investment performance of any sort. It is important to remember that this process is based on assumptions that may not reflect the behavior of actual events. For example, Monte Carlo Simulation may not fully account for certain rare and extreme market catastrophes which fall outside normal expectations.
Monte Carlo Simulation relies upon key assumptions about the risk and return behavior of asset classes. The asset class forecasts used for simulation data shown in this calculator are created using Russell Investments' proprietary models that incorporate historical data from market and economic indexes. The historical index data used are from the CRSP Market Cap Series (US Equity), Barclays Capital Aggregate Bond Index (Fixed Income), MSCI All Country World Index (Non-US Equity), and the NAREIT Equity REIT Index (Real Estate). Indexes are unmanaged and do not reflect the deduction of management fees, and cannot be invested in directly. Index return information is provided by vendors and although deemed reliable, is not guaranteed by Russell or its affiliates. Russell's capital markets forecasts are typically updated twice a year in January and July. Because assumptions about the capital markets evolve over time, results of the calculations may vary over time. Your actual experience may be different than the Russell capital markets forecast.
The simulation process uses the following assumptions:
The length of the first stage is determined as follows: If the investor Age is less than 80, then the first-stage horizon is 20 years; otherwise it is 10 years. The length of the second stage depends on the Marital Status of the investor. If single, it is for the lifetime of the individual. If married, it is for the lifetime of both individuals (i.e., the last to die). Married individuals are both assumed to be the same age. If they are of different ages, it is generally recommended to enter the younger person's age for the analysis.
Similarly, the Future Portfolio Balance is computed at the first-stage horizon. If the investor Age is less than 80, this is 20 years; otherwise it is 10 years.
The use of this methodology is not a recommendation for annuitization at any particular time, but rather is simply a means for measuring the likelihood of sustainability of a spending plan.
Percentile values, including the Median which is the 50th Percentile, are solely for comparison purposes. These values can be used to compare relative probabilities of different outcomes. 80% of the simulated outcomes fall between the 10th and 90th percentiles. The 10th Percentile corresponds to wealth values in which 90% of the simulated cases exceed this level and only 10% fall below. It reflects simulated results assuming a series of extremely poor market conditions. Remember that it is possible to lose the entire value of a portfolio. A different set of assumptions would create a different probability distribution. Expert opinion regarding expected returns, volatility and market trends vary widely.
Expectations are created with proprietary models incorporating historical index data for the CRSP Market Cap Series (U.S. Equity), Barclays Capital Aggregate Bond Index (Fixed Income), MSCI All Country World Index (Non-U.S. Equity) and NAREIT Equity REIT Index (Real Estate).
Indexes are unmanaged, and do not reflect the deduction of any management fees, and cannot be invested in directly. They are provided for general comparison purposes only. Index performance is not indicative of any specific investment, and should not be viewed as a representation of future results. Deductions for fees and expenses are not reflected in index returns. If they were deducted, returns would be lower. Index return information is provided by vendors and although deemed reliable, is not guaranteed by Russell or its affiliates.
| Correlation* | |||||||
|---|---|---|---|---|---|---|---|
| Asset Classes | Expected Return | Standard Deviation | US Equity | Non-US Equity | Real Estate | Fixed Income | Inflation |
| US Equity | 8.5% | 17.6% | 1.00 | ||||
| Non-US Equity | 8.5% | 20.1% | 0.74 | 1.00 | |||
| Real Estate | 7.3% | 15.4% | 0.52 | 0.43 | 1.00 | ||
| Fixed Income | 4.1% | 4.2% | 0.20 | 0.18 | 0.10 | 1.00 | |
| Inflation | 2.0% | 3.4% | 0.14 | 0.15 | 0.00 | 0.61 | 1.00 |
*Correlation coefficients, which can range from 1.0 to -1.0, measure the degree to which the movements of two variables are related. A correlation coefficient of 1.0 means that two variables move in a completely synchronized manner, while -1.0 means they move completely opposite. A coefficient of zero means that the movements are completely unrelated. Combining asset classes with lower or negative correlations may help reduce the volatility of a portfolio's returns over time.
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