Asset Allocation Is Found To Be The Least Important Retirement Planning Focus

Wednesday, April 11, 2012 09:18
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Asset Allocation Is Found To Be The Least Important Retirement Planning Focus

Tags: investment strategies | retirement planning

 

The emphasis on asset allocation to produce income for retirees and to optimize portfolio performance may be circumventing other, just as important, aspects of retirement planning. The right time to retire, current spending habits, and seeking other sources of retirement income such as reverse mortgages may hold just as much impact for reaching retirement goals.

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Many investors who planned to retire by a certain date have had to continue working because of the recession. These retirees may benefit from waiting to receive Social Security income later so that their payments will be larger after they stop working.
 
Investors who have not sufficiently saved for retirement may need an income boost or cash infusion from another source, often times their homes. A recent survey found that asset allocation is actually a minor consideration in light of the full spectrum of retirement portfolio needs.

 
 

 

Comments (9)

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derekd865
And to think that some of the talking heads out there think the silver bullet to financial success is simply reducing fees.
derekd865 , April 12, 2012
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brentb843
Asset Allocation
For this portion of the project, the asset allocation exercise was simply to allow each
household to invest all its assets in equities, earning a 6.5 percent real return, and face no costs
associated with the increased risk. Investing 100 percent in ‘riskless equities’ will have an
impact on both projected wealth at retirement and the amount that the household can consume
during the course of retirement. The notion is that if asset allocation does not dominate the other
levers with ‘riskless equities,’ it would never dominate.
brentb843 , April 12, 2012
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brentb843
Wow - see the above rationale, pasted from the "research" assuming the only asset allocation options are 100% equities or 100% risk-free assets.

Not only does the authors fail to recognize that risk free assets are theory and pose a 'run out of money' risk to retirees, they seem not to understand asset allocation.

The authors naively assume that if a person has saved $10,000 than asset allocation is able to save them by generating billions of dollars a year in returns. Asset allocation impacts only the portfolio returns (yes returns because volatility drives returns) which is the portion of savings that is designed to meet the gap when all other options have also been considered implemented.

I cannot believe this paper was ever published.....
brentb843 , April 12, 2012
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vguettlein
Unless I missed something recently, reverse mortgages aren't often a very good deal - plan D in my book - a last resort. So, DID I miss something? Have these expensive products, mostly hocked by the mortgage industry's equivalent of annuity salesmen, somehow cleaned up their act and are now a "good deal"?
vguettlein , April 12, 2012
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lisagray
This is another testament to clients and advisors thinking on two different tracks. The main point of this article is the fact that asset allocation is not all you should be focusing on with your clients. There are multiple factors that should have as much or more weight than asset allocation. For example, deciding when a person wants to retire can have a lot to do with how the assets are allocated because of time horizon and liquidity needs considerations. Planning for unexpected events can wreak havoc on any portfolio.

These other issues should be addressed before the assets are allocated. Allocating them without understanding the client's needs at a deep level is a choice to remain in a losing conversation in the new wealth management environment.

After those needs have been discovered--and this should take a while, it can't really be done over a one or two hour meeting--then the allocation can be designed based on those needs. The point is to broaden the conversation beyond what's best for the portfolio. What's best for the client has to be determined first.

Regarding reverse mortgages, I generally agree with you and even in this lower fee case, I would save it as a last resort. But with the lower fee offering, it might make sense if all other options are exhausted.
lisagray , April 13, 2012
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vguettlein
Lisa, I think you have read WAY TOO MUCH into my comments. I said absolutely NOTHING about asset allocation or working longer. I certainly made no reference to a one or two hour meeting. My comment was ONLY about reverse mortgages. Nothing else. Next time, please don't pass judgement on things I didn't say! You have no idea how I interact with my clients and it's arrogant and ignorant for you to assert that I'm "thinking on (a) different track" than my clients, or that all I am focusing on is asset allocation.
vguettlein , April 13, 2012
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lisagray
Profuse apologies!! I should have made two separate comments instead of trying to make both within one post. I certainly was not intending to bring asset allocation into my comments about reverse mortgages.

Apologies for not making my comments more clear. This is a case of misunderstanding.
lisagray , April 13, 2012
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vguettlein
Accepted, and forgiven. Have a nice weekend.
vguettlein , April 13, 2012
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lisagray
Thank you! You, too.
lisagray , April 13, 2012

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