NEW YORK (MainStreet) -- Landing a probe on a comet in the middle of the solar system is easier than calculating the savings required to generate a target retirement income. At least it seems that way. That's because so many investors -- and advisers -- rely on "back of the envelope" calculations, practically pulling a number out of thin air. If scientists had taken that approach, the little comet-exploring Rosetta spacecraft would have sailed right on past its target.
For years, advisers have relied on the "4% rule," the rule of thumb that dictates a 4% annual retirement income drawn from investment assets. If only it were that easy in reality.
"Common approaches like the '4% rule' are easy to understand, but do not account for a client's individual circumstances and can lead to unintended mistakes," says Rod Greenshields, consulting director with Russell Investments.
"We think advisers would do well to follow the lead taken by defined benefit plans and calculate a funded ratio. By determining the cost of a client's liabilities compared to the value of their assets, the funded ratio offers a superior method of evaluating retirement readiness.
"The math behind the ratio is sophisticated, but the outcome is a simple yet powerful percentage that most clients understand immediately. ..."