Fixed income returns have underwhelmed in recent years. But those shorter-term results might matter less than you think when making projections for a client’s portfolio.

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Vjosana Klosi, director of portfolio construction at CIBC, says her firm’s methodology is “based on long-term, 10-year forecasted returns.”

One reason for that is trends for long-term interest rates and economic growth affect returns, she explains. In contrast, “Performance will be less impacted by short-term decisions of monetary policy,” says Klosi, who co-authored a May 2017 research paper on sustainable withdrawal rates.


Projection tips

To project portfolio returns, Klosi’s firm follows two steps.

“The first step is determining an appropriate portfolio allocation for five pre-determined investor risk profiles,” she says. The goals for these profiles range from capital preservation to aggressive growth, and allocations reflect those goals.

Read: Your guide to goals-based investing

Once appropriate asset allocation is determined, the next step is calculating withdrawal rates. The ideal rate leads to “a very low probability of the portfolio reaching zero, or of the portfolio not meeting retirement goals,” says Klosi, adding that the associated success rate of meeting those goals should be at least 90%.

Her research finds the gold-standard 4% withdrawal rate is unsustainable, given low interest rates and forecasted asset class returns. For lower-risk profiles, optimal withdrawal rates instead range from 2.5% to 3.5%.

Legacies and losses

Clients’ unique circumstances also impact withdrawal rates.

“Investors who are highly dependent on portfolio returns should lean toward more conservative profiles and lower withdrawal rates,” says Klosi, to ensure their funds are insulated and longer-lasting.

Meanwhile, she adds, “retirees with long-term legacy goals over and above their retirement expenses [may want] to invest in higher-yielding, high-risk profiles,” to ensure they get high enough returns to meet those goals – so long as their risk profiles allow this.

Alternatively, investors could accept a lower success rate.

Read: Should retirement age eligibility be based on life expectancy?

Another key factor is portfolio performance in the first five years. “While unlikely for low-risk profiles, [if] the portfolio loses more than 10% with no recovery in the first five years, the success rate will be lower,” finds Klosi — even with a conservative withdrawal rate of 3.5%.

In such a scenario, switching to a lower, 3% withdrawal rate instead “will be more prudent for a risk-averse investor,” Klosi suggests.

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