By Abby Farson Pratt
There might be a better way to talk to clients about how long their retirement portfolios will last. To start, what if financial advisors stopped using shortfall (or ruin) probabilities as the guiding risk metric for retirement income planning?
Moshe Milevsky, a professor at York University, proposes the idea of comparing the client's life expectancy with the longevity of the client's retirement portfolio - a much more approachable way to communicate with clients, who are accustomed to thinking about their own longevity in units of time.
In his Viewpoint "It's Time to Retire Ruin (Probabilities)," published in the March/April 2016 issue of the Financial Analysts Journal, Milevsky suggests that financial advisors provide clients with the number of years their retirement portfolio will last, relying on a framework that is clearly communicated and simple to understand.
Barbara Petitt, CFA, managing editor of the Financial Analysts Journal and head of journal publications at CFA Institute, recently interviewed Milevsky.
"We should back off a bit from 'shortfall' and 'failure' probabilities, and we should focus more on using the language of longevity," Milevsky says.
"Since individuals have an innate ability to understand longevity - you're expected to live 25 years, you might live 30 years - they think about retirement already in units of years and longevity. Let's convert the portfolio problem into the same units of years and longevity."
Milevsky also shared his thoughts regarding the major challenges on the horizon, including the "new normal" of the current low-interest rate environment, the declining use of defined benefit pension plans, and the considerable amount of time most of us will be living in retirement.
Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.