Our Approach
Retirement planning is an extremely broad
segment of the financial services industry. It encompasses
everything from pre-retirement asset accumulation to estate and
legacy planning. The event in retirement planning which, in most
cases, has the longest duration is the income distribution phase.
In some cases this phase can last for forty or more years. The goal
in retirement income distribution planning is to create portfolios
designed for a lifetime of consistent rising income.
There are several ways in which we can define retirement
plan failure. Each retiree has a distinct vision of
where he would like his money to take him and hence, a different
vision of how their plan can fail. The most obvious failure
of a retiree's retirement plan is the result of one event:
depletion of funds prior to death. Since this occurrence is
the most preventable, the Wiley Group seeks primarily to avoid it
in retirement planning and portfolio construction. The
problem that the retirement planner faces is anticipating thirty or
more years of market performance and constructing portfolios that
are designed to last for the duration of a client's retirement.
Risk-Adjusted Return
The current thinking in retirement planning takes into account
total risk-adjusted return. An analysis of ten different
retirement planning firms with ten different methodologies might
result in nine out of ten looking to maximize "risk-adjusted
return." The amount of return a client can expect versus each
unit of risk needs to be optimized based on goals, life expectancy
and individual risk tolerance. The evaluation of these three
factors is one of the first things a new financial advisor learns
during training. While the risk-adjusted return is
an important element in retirement planning, constructing
portfolios based solely on risk-adjusted return may neglect two
very important factors in planning for a lifetime of income.
Beyond Risk-Adjusted Return
The goal of this paper is to explain the belief of Wiley Group
that these two additional factors: low-volatility and high
cash-flow are equally important in planning for retirement and
constructing portfolios for a lifetime of income. The planner
must then find the delicate balance between the need for
low-volatility, consistent cash flow and total risk-adjusted
return. The planner must also consistently monitor not only
the objectives of the client, but also the state of the economy and
markets in order to make adjustments to the portfolio as
necessary.
First, we will examine each of these criteria and their effects
both on the empirical performance of a portfolio and on the
psychological impact of their inclusion. We will then examine
a hypothetical case of 2 retiree portfolios beginning in
1999. Next, we will examine the specific goals of Wiley Group
in creating portfolios for a lifetime of income. We will also
examine the methods the Wiley Group uses in portfolio
construction.
Next Section: The Three Most Important
Criteria
