David Goodsell

Executive Director of the Durable Portfolio Construction Research Center
Natixis Investment Managers – U.S. Distribution

Retirement income planning should be a simple word problem that can be solved with basic math. Start with estimated annual expenses in retirement. Multiply that figure by the estimated number of years in retirement, then divide by the number of years until retirement age, and that yields an annual savings goal.

If only it were that simple.

Retirement income planning is a complicated process with many variables at play. Expenses can be hard to forecast. Just healthcare and long-term care alone will add up to a large share of retirees’ budgets and those costs continue to escalate. The length of retirement is also escalating as life expectancies have increased by one year every five years since the middle of the 20th century. Even savings are variable as retirement accounts encounter different rates of return and potential losses over the long-term.

Matching liabilities and assets
The problems individuals face in retirement income planning are not all that different than pension plan administrators. They need to manage their retirement assets today with an eye toward meeting future liabilities. The critical difference is that most investors are only getting half of the picture: their assets. What they may need is an advisor who serves the role of personal Chief Financial Officer – someone who can help them match their assets to liabilities they won’t encounter for decades. Given the uncertainties that are an inherent part of financing retirement it is surprising that a majority of investors say they have it all figured out. Among the respondents in the latest Natixis Investment Managers Global Survey of Individual Investors, two-thirds of investors say they know how much they need to save to reach their retirement funding goals, the same number also say they know how much annual income they will need in retirement and say they have estimated their expenses in retirement. And as a result, they report saving an average of 12.1% of their current income toward retirement.

Problem solved. Right?

Probably not. The math behind investors’ estimates may not add up for many. Three in ten Baby Boomers in our survey say they have not taken the step to figure out how much they will need to retire. Worse yet, more than a quarter of those who report they are already retired do not have an estimate of their expenses.

It’s human nature to work with a broad estimate of what’s needed when the math is complicated and the goal may be decades in the future, but working to ensure a successful retirement may require a more sophisticated approach.

Advisor as CFO
According to Natixis Investment Managers Chief Market Strategist, Dave Lafferty, taking on the CFO role may be one of the most important services financial advisors can offer to their clients. “If you think about a financial advisor as the CFO of a client’s retirement planning, what most do today is simply look at the asset side of the balance sheet. They report on the portfolio: The S&P did this, your fund did that, and you grew by 5%, for example,” he said.” “Very few FAs report on the liability side.”

Ultimately this is personal benchmarking, a practice which aims to identify an investor’s personal liabilities and match them with the future value of their assets. It’s an approach that requires a different way of thinking about investment management and changing the measures of success.

“Look what’s happened to public pension funds,” Lafferty said. “The stock market has gone through the roof over the last eight years, interest rates have fallen, and most pension funds are in worse shape, not better.” He points out that institutional assets have risen in this timeframe, but not as fast the liabilities. “Interest rates have fallen so much, the present value1 of the liabilities has been driven up.”

Investors may not see it the same way. In many cases, their equities have grown, their bond investments have had a solid run and appear to have plateaued. But now may be the time to educate clients on the implications of a rate increase that may be good for them in the long run.

But when rates begin to back up, Lafferty says advisors are likely to have clients who are scared, because their bond funds may be losing money. What they don’t see is that their actual funding ratio may be improving because the present value of their liabilities are falling.

“Not many in the retail world really look at liabilities,” he said. “While the math of retirement is the same for individuals is the same as it is for pension funds, the institutions have a real advantage because they understand their liabilities in a way that most retail investors or individual investors don’t.”

A new client conversation
The next move for advisors may be to change the dialogue with clients. At a time when 51% of advisors say they are feeling fee pressures, this is a critical opportunity to demonstrate the value you can provide. Start with a frank discussion about retirement in financial terms. Help clients visualize how they will live in retirement and establish set costs – or liabilities – to the expenses they are likely to encounter. This may provide a more realistic framework for the rough estimates clients have for their future needs.

Going forward, investment performance has a sound basis for evaluation. That hypothetical 5% return now has personal context – did it move clients closer to meeting their future expenses?

Read our Latest Insights page for more information on investors sentiment and the economics of retirement.


1 The term present value refers to the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, February-March 2017. Survey included 8,300 investors from 26 countries.

Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.