Retirement planning is varied and complex, determined by several variables that change from client to client. But research has proven that having a retirement plan in place helps savers and retirees better stay the course during challenging economic times. There are several strategies that advisors can use to help them establish a retirement income plan, explains Krisna Patel, CFA, investment advisor representative at Woodbury Financial Services.
The Variable Strategy for Retirement Income
This retirement strategy is for clients that have changing income needs each year. David Blanchett, CFA, CFP, head of retirement research at Morningstar Investment Management, found in research last year that retirees generally spend the most in the early and late years of retirement, tapering their spending in the middle. These are spending trends that are logical for the needs of retirees: many do the bulk of their consumption and large purchases in the early years of retirement, and healthcare bills become larger over time, creating outsized spending needs later in life.
A variable strategy can look a lot of different ways, but one of the more basic approaches is to plan for initial income to be higher upfront and gradually decrease over time while also considering healthcare needs down the road. It’s a strategy that can be challenging because retirees often acclimate to higher income upfront and may have difficulty moderating behaviors and habits to account for diminishing income over time. Following through on this type of strategy can be difficult in the later years, on top of it being very difficult to estimate what the income reduction will need to be.
The Dynamic Strategy
A dynamic approach also accounts for flexibility in adjusting to changing market conditions. One of the more well-known approaches to this strategy is using the Monte Carlo (define this) simulation that analyzes thousands of different equations and scenarios to find a probability of distribution success. This allows for income to be adjusted based on the probabilities supplied by the Monte Carlo.
The largest challenge to this strategy falls in calculating for 100% desired outcome; the realized outcome will rarely be that high, so retiree confidence levels are key. Determining each client’s income comfort level can vary not only individually but also over time. It’s an approach that relies heavily on a client’s willingness to adjust their spending up or down, similar to the variable strategy.
The Insuring Strategy
All the strategies discussed operate on a set retirement time horizon, but duration needs are always impossible to determine completely. Patel offered a useful strategy (is it called “The Insuring Strategy” – it’s a little unclear if that’s the name) that can be employed alongside other retirement strategies to ensure a stable income stream for clients through an insurance company.
“In this scenario, a retiree works with an insurance company to provide income over a single or joint lifetime in exchange for a lump sum. To evaluate the strategy, one must balance the comfort of receiving an income, regardless of market performance or longevity, against the costs. Principal accessibility, beneficiary payouts, creditworthiness, and costs are but a few factors to consider,” Patel writes.
Nationwide offers a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies for those seeking retirement income options for their clients as part of their bigger retirement planning picture. These include the Nationwide Nasdaq-100® Risk-Managed Income ETF (NUSI), the Nationwide S&P 500® Risk-Managed Income ETF (NSPI), the Nationwide Dow Jones® Risk-Managed Income ETF (NDJI), and the Nationwide Russell 2000® Risk-Managed Income ETF (NTKI).
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This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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KEY RISKS: The Nationwide Nasdaq-100® Risk-Managed Income ETF, Nationwide S&P 500® Risk-Managed Income ETF, Nationwide Dow Jones® Risk-Managed Income ETF, and Nationwide Russell 2000® Risk-Managed Income ETF (collectively, the “Risk-Managed Income ETFs”) are subject to the risks of investing in equity securities, including tracking stock (a class of common stock that “tracks” the performance of a unit or division within a larger company). A tracking stock’s value may decline even if the larger company’s stock increases in value. The Risk-Managed Income ETFs are subject to the risks of investing in foreign securities (currency fluctuations, political risks, differences in accounting and limited availability of information, all of which are magnified in emerging markets).
The Risk-Managed Income ETFs may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Risk-Managed Income ETFs employ a collared options strategy (using call and put options is speculative and can lead to losses because of adverse movements in the price or value of the reference asset). The success of the Risk-Managed Income ETFs’ investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Risk-Managed Income ETFs expect to invest a portion of their assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index.
The Risk-Managed Income ETFs frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Risk-Managed Income ETFs and greater tax liabilities for shareholders. The Risk-Managed Income ETFs may concentrate on specific sectors or industries, subjecting them to greater volatility than that of other ETFs. The Risk-Managed Income ETFs may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Funds’ value and total return. Although the Risk-Managed Income ETFs intend to invest in a variety of securities and instruments, the Risk-Managed Income ETFs will be considered non-diversified.
Additional risks include: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index. The Fund frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Fund’s value and total return. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered nondiversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
Nasdaq-100® Index: A rules-based, market capitalization-weighted index of the 100 largest, most actively traded U.S. companies listed on the NASDAQ stock exchange. The Index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.
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S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.
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The Nationwide Russell 2000® Risk-Managed Income ETF (“NTKI”) has been developed solely by Nationwide Fund Advisors. NTKI is not in any way connected to nor sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies. All rights in the Russell 2000® vest in the relevant LSE Group company which owns the Index. “Russell®” is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license. The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of reliance on or any error in the Index or (b) investment in or operation of NTKI. The LSE Group makes no claim, prediction, warranty nor representation either as to the results to be obtained from NTKI or the suitability of the Index for the purpose to which it is being put by Nationwide Fund Advisors.
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