Blog Series: Retirement Income Architecture

April 17th 2017, by Lyle E. Hershey

I’m guessing you have heard of the old adage “Don’t put all your eggs in one basket.” In financial planning this saying is a word picture we use to illustrate diversification or asset allocation. This adage is usually connected to the idea that it is wise to spread our money between different types investments. The theory is that if some portion of the investment markets are performing poorly, there are other areas that could be doing significantly better. By spreading your money into different “investment baskets,” your investment experience might be disappointing from time to time, but you will probably avoid catastrophic results.

This is our fourth and final blog article in our Income Architecture Blog Series. We believe that there is wisdom in diversification beyond simply investment management. It can also be utilized when designing a retirement income plan. Our Retirement Income Architecture planning strategy generally incorporates three income generation techniques. Retirees face a number of increased risks due to their stage of life. These include longevity risk, excess withdrawal risk, inflation risk, reinvestment risk, liquidity risk, and legacy risk. Any single retirement income generation technique can reduce or eliminate one or more of these risks, but at the same time could leave you exposed to or even increase the likelihood that you face another one of these risks. By combining multiple retirement income generation techniques, we are able to create a comprehensive strategy that addresses the major risks facing retirees.

The three income generation techniques that we use in our Retirement Income Architecture Strategy are flooring, bucketing, and systematic withdrawal. The flooring technique creates a lifetime income foundation from predictable income sources such as Social Security, pensions and lifetime annuity contracts. The bucketing approach divides retirement into two or more distinct time periods, and each time period is allocated the necessary retirement assets to deliver specified outcomes for that designated period of time. An appropriate investment portfolio is then selected to match the timeframe and objectives of that bucket. The systematic withdrawal approach calculates the necessary withdrawal rate to satisfy the income need and then regularly takes that amount out of a moderately conservative investment portfolio.

Our Retirement Income Architecture Strategy is designed to mitigate the major risks associated with generating retirement income by combining three distinct income generation approaches into one comprehensive strategy. Financial planning would be a lot easier if we lived in a completely predictable world. We, of course, do not. In the absence of a predictable future, we believe a diversified approach to income generation is a prudent way to face the unknown outcomes of life.

*Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.