Business schools still teach ROI, I’m sure. For most Americans, unfortunately, it might be the wrong ROI.
Business schools are probably stuck on return on investment, and I can argue that many financial planners are still talking to their clients about return on investment. However, I say the new ROI is Reliability Of Income. For most retirees, the need for a steady, dependable, lifetime income continues to grow in importance.
So many planners and schools focus on the returns of a portfolio. In reality, the changes in return from 5 percent to 6 percent, for example, have a nominal difference on the retiree’s income outcome. Now, the sequencing of those returns, especially early in retirement, may have a larger effect on the outcome. But overall averages will not impact the success or failure of a retirement plan. Instead, the larger impact comes from life expectancy, which is a variable we cannot predict.
Therefore, clients need to have a guaranteed, inflation-adjusted floor of dependable income in their portfolio. Without it, the success of their retirement portfolio can’t be projected accurately. Too many variables – like return on investments, life expectancy, sequencing of returns, health care costs and emergencies – could impact the probability of success.
By focusing on the reliability of their income, clients can reduce the risks in their retirement portfolio. Inflation can be mitigated with cost-of-living increases. Longevity can be eliminated with lifetime income options – both single and joint. Fee and tax drag can be greatly reduced, if not eliminated, by proper choice of product.
Bottom Line: Put first things first when designing a portfolio – reliability of income should be the new ROI.
© 2018 Ash Brokerage LLC.