Russell Presents New Approach to Retirement Income Planning and Portfolio Construction (Russell.com)

Russell Presents New Approach to Retirement Income Planning and Portfolio Construction
Paper appears in the August issue of The Journal of Financial Planning

Tacoma, WA — September 6, 2007 — The Journal of Financial Planning, the official academic journal of The Financial Planning Association (FPA), has published a paper in its August 2007 issue by Richard K. Fullmer, CFA, senior strategist at Russell Investment Group, which presents an entirely new approach to retirement income planning and portfolio construction.

The paper—titled "Modern Portfolio Decumulation: A New Strategy for Managing Retirement Income"—outlines in detail an investment strategy aimed at improving an individual's ability to obtain a stable and steady stream of income for life from a retirement portfolio, with a secondary goal to preserve wealth for one's beneficiaries. The paper can be viewed in full at www.fpanet.org/journal/articles/2007_Issues/jfp0807-art6.cfm or www.russell.com/news.

The paper argues that asset accumulation and asset decumulation are two different problems that require different investment solutions. The goal of accumulation is to acquire wealth; the goal of decumulation is to achieve lifetime cash flows from the portfolio. Applying the same strategy to both can result in a suboptimal outcome. Moreover, decumulation is further complicated by longevity risk—meaning it is impossible for individuals to know with certainty how long their portfolios must fund their spending needs.

Financial planners typically recommend two strategies for their retiree clients to manage this longevity risk—buy guaranteed annuities and/or reduce spending should markets under-perform expectations. But Fullmer presents a case for an alternative strategy. He argues that longevity risk can be turned into investment risk, thereby allowing it to be managed within the investment portfolio. As a result, spending modifications may not have to be made as a first response, and the investor may be able to delay the use of annuitization or costly pre-annuitization guarantee provisions until later. The ability to purchase an annuity is actively factored into the investment strategy.

"Using this approach, it is the portfolio, rather than the investor's standard of living, that first responds to market performance and economic conditions," said Fullmer. "Furthermore, it seeks to allow the investor to preserve liquidity early in retirement and purchase a desired income stream in the future. There is no doubt that annuitization offers retirees a valuable benefit that an investment portfolio cannot—a guaranteed lifetime income stream. However, annuitization may also have drawbacks. So if a retiree does not need or wish to annuitize immediately, he or she should still strive to maintain the valuable option to annuitize at some point in the future when it makes strategic sense."

The paper provides a detailed explanation of how such a strategy could be executed. It describes a new multiple period cash-flow-based investment framework that incorporates a dynamic asset allocation strategy and uses the projected cost to annuitize the investor's desired lifetime income stream as a hurdle for managing longevity risk within the portfolio.

"This new approach seeks to allow investors to maintain a desired standard of living while at the same time preserve their wealth for gifts or bequests," said Randy Lert, chief portfolio strategist at Russell. "By combining longevity and investment risk they can be managed holistically and thus more effectively. This provides an intuitive and simple way for planners and advisors to assist their clients by evaluating at any point in time whether it makes sense to continue to invest or to annuitize."

Richard Fullmer will be available for media interviews on this topic at the upcoming FPA Conference in Seattle, from September 8-11. To arrange an interview please contact Jennifer Tice at 253.439.2921.

About Russell: Russell Investment Group provides investment products and services in more than 44 countries. Russell manages $219 billion in assets as of June 30, 2007.

Contact:
Jennifer Tice, 253-439-1858
Matt Burkhard, 718-875-2122

Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company.

RFD: 07-7019
First used: August 2007