Asset Location Over Allocation

Asset Location Over Allocation

As I travel back from a business trip in Portland, I’m reminded how important location is on an airplane. Flying four and a half hours in the middle seat is not fun, especially when you don’t sleep on an airliner like me. 


Over the past few years, the location of assets has become more important in the financial planning arena. The biggest reason is the continued shift to income versus accumulation. During distribution, income is more important than the rate of return, which is largely driven by the allocation of assets. Let’s look at an example where location can improve your chances of success. 


Average Couple, Average Approach

A typical American couple approaches your firm. They have done a nice job of creating a nest egg for their retirement and would like to receive $50,000 a year in retirement income. They anticipate receiving $20,000 of annual Social Security income. So, they need to take $30,000 a year from their accumulated assets of $750,000. In other words, they will need to sustain a 4 percent withdrawal strategy from their assets under management. 


While the 4 percent rule worked during higher interest rate periods, most economists believe the safe withdrawal rate is around 2.8 percent to 3.5 percent. Without a doubt, this couple is in jeopardy of a significant failure in retirement, especially if they were to have a significant drop in asset value early in their retirement years. This is where asset location can make a huge difference over asset allocation. Because allocation doesn’t fully protect the clients from a loss in their account – it might make the ride smoother or reduce their losses and gains, but it will not provide protection from losses. 


What worked for clients during the accumulation phase will not work for them during the distribution phase. In fact, in many cases, the strategies that clients used to accumulate assets will hurt them in retirement.


New Approach, Better Outcomes

Let’s look at using different products to sure up their retirement income.

  • First, the couple buys a single premium immediate annuity (SPIA) to secure $9,000 of annual income. In today’s interest rate environment, that will cost just under $170,000 of the account value. The SPIA’s income is protected for both the couples’ lives, and if they both die before using up the $170,000, their beneficiaries get the balance of the unused funds. 
  • Next, the couple purchases a fixed indexed annuity (FIA). The $100,000 FIA generates $5,000 of guaranteed annual income. The clients remain in control of the assets and can change the annuity if something happens. 
  • Their remaining $480,000 is invested in their asset allocation strategy according to their risk tolerance. The assets only need to create $16,000 of annual income off the $480,000 in assets. That means that the use of two additional products reduces the withdrawal percentage to 3.3 percent. Most would agree the 3.3 percent is a significant improvement to the withdrawal percentage and increases the probability of success. 


The result is that the clients begin their retirement with the same $50,000 of targeted income: 

  • $20,000 from Social Security 
  • $16,000 from the systematic withdrawal strategy
  • $9,000 from the SPIA
  • $5,000 front the FIA


Notice that between Social Security and the annuities that $34,000 of their $50,000 annual income is guaranteed for the rest of their lives. That’s makes a powerful impact on their retirement income strategy.


Check out our one-page sales idea on this concept, and I think you will see that the location of assets is far more important than the allocation of the assets. The location strategy provides more consistent income with less volatility in income. Your clients will appreciate the guarantees and the unique location of their assets. 


Winning Strategy

Asset location is more important than allocation during the income phase. Look at using alternative income-producing assets to reduce pressure on assets and provide a more secure retirement income. 


About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”