December 23, 2014 - According to Nobel Prize recipient, Robert C. Merton, the move from defined benefit pensions to defined contribution pensions is creating a potential crisis.   (The Crisis in Retirement Planning, Harvard Business Review, July 2014)

Not only have complex investment decisions been put in the hands of consumers, but once in retirement, consumers are attempting to create lifetime income with an accumulation mind set.  Chasing returns and experiencing market volatility while systematically contributing to a retirement fund can have a successful outcome.  But chasing returns and experiencing market volatility while systematically withdrawing from your retirement fund can only lead to disaster.


When communicating the value of a client’s retirement account we must stop measuring it with accumulation metrics, i.e. balances, yields and standard deviations.  When our parents described their defined benefit pensions it was always in terms of salary replacement.   In other words, at retirement I will receive 50% of my salary for the rest of my life.  If you were to ask them about the balance in their pension, its annual rate of return or standard deviation they wouldn’t have had a clue, nor cared. Financial Advisors need to change the dialogue and focus for clients as they approach retirement and begin communicating their retirement fund balances in terms of income generation.

For example, if I had a client who was making $100,000 per year and she told me
that her 401k was worth $1,000,000, then I could tell her that it would replace 
about 40-50% of her current income. That’s a meaningful piece of information in
helping her determine if $1,000,000 is enough. 

What may have seemed to be a very large sum of money is now communicated with an entirely different perspective.  Most importantly, we have appropriately re-defined an accumulation acronym.  During accumulation ROI stands for return on investment, but during retirement it must mean RELIABILITY OF INCOME.  Now the discussion leads to the strategy necessary to create a reliable income stream. 

3D Asset Management strongly believes in a segmented or “bucket” strategy.  Through the WealthConductor™ program, 3D has created a comprehensive retirement income business model for financial advisors that offers training, marketing, case writing and practice management support for a segmented strategy.