Risk Assessment for Retirement Income: A Logical Innovation Whose Time Has Come
The need for certain innovations is just too obvious to explain why they’ve taken so long to emerge. One example is the process of assessing an investor’s risk tolerance for generating retirement income. Why is this important?
Certain types of retirement income are guaranteed (lifetime annuitization and GMWB income, as examples). Other income streams are not guaranteed and are, in fact, contingent upon the attainment or targeted, future investment returns over decades. What percentage of guaranteed versus non-guaranteed retirement income is appropriate for any given investor? And what targeted rates-of-return should be selected for that component of retirement income that is variable?
It’s now possible to answer these questions due to the advent of a formal retirement income risk assessment process. The risk assessment process begins with the completion of an online questionnaire that results in a “Guarantee Factor Score” and a “Volatility Factor Score” for each investor. Taken together the two scores provide financial advisors with the information necessary to illustrate a retirement income plan with just the right combination of guaranteed versus variable retirement income streams, not to mention the appropriate rates-of-return model for generating the variable income component.
This is big news, in my judgment. Suitability is well-served by the process of assessing retirement income risk tolerance. For example, is there a better way to provide a compliant context and process around the selection of a variable annuity GMWB rider to serve as the guaranteed income component of a retirement income plan? Rather than positioning the variable annuity as the “solution” to deliver retirement income, an inherently better approach is to position it as a vital component of a larger income distribution strategy. I believe that positioning VAs in this manner will not only enhance suitability but will also lead to expanded sales of variable annuities.
The theme of assessing retirement income risk will be explored further in the coming weeks. Next month a large, independent broker-dealer will introduce the first online retirement risk assessment application. It’s an exciting development that I believe will lead to improved compliance and suitability through a whole new outlook on planning for retirement income needs.
©Copyright 2007 David A. Macchia. All rights reserved.