When it comes to determining which investment product or strategies you are going to recommend in your client’s plan, advisors typically consider risk tolerance, time-horizon, and in some cases the tax qualification to arrive at a prudent recommendation. As a general rule of thumb, the longer the time horizon before the client may need or will need to access their money, the easier the decision process for the advisor regarding implementation of an investment solution to help the client meet their goals. The challenge occurs when clients may need or will need to access some of their money sooner rather than later. What are the best options to help the client protect and preserve the portion of their nest egg they will need to rely upon for income while not sacrificing growth potential to offset inflation, all while minimizing taxation? In this article, we will discuss how utilizing The Soon Bucket can help advisors confidently invest their clients assets.
The most successful advisors are those who are able to meticulously communicate their planning philosophy, how the investment products and portfolios they recommend contribute to the overall success of the plan, and how the plan will bring peace of mind to the client.
One of the most basic principles of investing is to gradually reduce your risk as you approach a point in which you will need to draw off your investable assets, since retirees don’t have the luxury of waiting for the market to bounce back after a dip. The dilemma is figuring out exactly how safe you should be relative to your stage in life.
For years, a commonly cited rule of thumb has attempted to help simplify asset allocation. It states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 65-year-old, 35% of the portfolio should be equities. The rest would be comprised of safer assets. There are four main problems to this type of approach we have observed:
- Clients don’t understand how asset allocation translates to income generation
- With a generic asset allocation formula, you could neglect that clients might have below average or above average life expectancy, which could cause them to become too cautious, missing growth opportunities or too aggressive, causing them to run out of money
- Client’s may become too conservative later in life, investing in assets that might not be tax efficient to a surviving spouse or other beneficiaries
- Struggles with properly identifying and implementing opportunities with “safer assets” while still being able to earn a competitive interest rate
As a solution to overcome these four problems, Clarity 2 Prosperity redefine traditional asset allocation through The Bucket Plan®.