Retirement Spending Needs a New Approach: Vanguard's Ryan Barrows

The decumulation stage of drawing down a portfolio once retired is clearly more stressful for clients than the accumulation stage of retirement planning. Indeed, the withdrawal state requires a different approach, argues Ryan Barrows, principal and head of Vanguard’s Financial Advisor Services, in an interview with ThinkAdvisor.

“You need a more dynamic approach than withdrawing, say, 4% of your portfolio a year no matter what,” says Barrows, who leads Vanguard’s RIA channel serving third-party advisors, which is the firm’s largest division.

Barrows is talking specifically about Vanguard’s “dynamic spending strategy,” a hybrid of the dollar plus inflation and percentage of portfolio rules, as defined on a Vanguard website.

It is based on the firm’s research in 2017 that introduced a “dynamic spending rule” and a “percentage of portfolio rule.”

The dynamic strategy “can position a portfolio to benefit from potentially higher returns and protect a portfolio’s long-term spending power,” according to Vanguard.

In the interview, Barrows, who’s been with the firm for nearly a decade and who led the team that launched Vanguard’s U.K. individual investment service, explains how dynamic spending means always  “reacting to ‘Where am I today [financially]?’ and ‘What are my goals today’?’” in response to market movement and other events, he says.

Financial planning is part of the offering of “the vast majority” of RIAs with whom Barrows interacts, he notes. Client financial coaching is a key component of that.

“Some clients have their goals in the subconscious. The advisor can help bring them forward and articulate what goals they’re trying to achieve with their financial assets,” he says.

“Then [the advisor will] construct a portfolio that will match the risk and duration of those goals to help achieve them,” Barrows adds.

As for other Vanguard developments relevant to RIAs, Barrows discusses how the firm’s acquisition last year of the technology company Just Invest is providing advisors with personalized direct indexing capability for clients.

In addition, Vanguard is “leaning in quite heavily” on its active fixed income funds, “96% [of which] have outperformed their peer group averages over the last five years,” Barrows notes.

ThinkAdvisor recently held a phone interview with Barrows, who was speaking from Vanguard headquarters in Malvern, Pennsylvania.

Asked to compare the attributes of RIAs versus other advisor segments, he says: “My sense is that the distinction by channel is blurring ever-more every day. There is no monopoly on good advice in any one segment.

“But,” he adds, “the fiduciary standard for advice and the planning component are most attractive to clients.”

Hera are excerpts from our conversation:

THINKADVISOR: The RIA channel is “ill-prepared for the retirement needs of millions … and will lose out because its view is ideal for capital growth but wrong for income distribution” an article in Advisor Perspectives opined. What do you think?

RYAN BARROWS: I disagree. RIAs are very clear-eyed about the decumulation phase [of retirement] and how to help their clients navigate it.

RIAs are very well positioned, because they’ve had conversations with baby boomers about what they’re looking to do in their golden years and have helped those clients create portfolios that will allow them to achieve those goals.

The accumulation stage is very different from the decumulation stage. Please explain.

It’s definitely more stressful if you’re at the decumulation stage, drawing down your portfolio, than when you’re in the saving stage.

So the decumulation stage is where we see advisors use a [much different] approach.

We’ve done some interesting research on what we call “dynamic spending.”

[The point is that] it’s not like you can make a decision at 65 that when you retire, you’re going to withdraw 4% of your portfolio a year no matter what and not think about that decision for the rest of your retirement years.

You always need to be reacting to “Where am I today [financially]?” and “What are my goals today?”

Advisors can add value to help clients continue to have that conversation.

Please elaborate on dynamic spending.

You need to use a more dynamic approach to that drawdown phase, taking into account what happened in the portfolio last year and continuing to move the client toward their goals but being responsive to the current market position.

During the last 10 years, if you had set withdrawal at 4% [a year], you probably underspent your portfolio because you likely had a fair amount of appreciation if you had a balanced portfolio.

What we see is a lot of high-net-worth folks who underspent their portfolio by, for example, not taking a vacation they were planning.

Of course, the converse could be true in the future. Equity markets could be flat or even down over a longer period of time.

If that happens, you’ll have to think things through: Can I maintain the level of spending that I planned when I came into retirement?

Are the RIAs that work with you particularly interested in retirement planning for their clients?

They are. The vast majority of RIAs I speak to have a planning capability of some sort.

What we see now that’s prevalent in the market is “financial coach.” That’s very aligned with our perception at Vanguard of how advisors can add the most value: financial coaching.

By that, I mean helping clients understand what their goals are. That’s a huge part of the equation. Some clients have their goals in their subconscious.

The advisor can help bring them forward and articulate what goals they’re trying to achieve with their financial assets, then construct an investment portfolio that will match the risk and duration of those goals to help achieve them.

They’ll tell the client whether they’re on track or off-track given their stated goals and how much they’re saving and can expect to spend.

We think that process is really important because most people aren’t investing just for the sake of seeing that number go up — they’re investing to achieve something [specific] in their lives.

Do RIAs bring anything to the party that maybe advisors in other channels do not?

My sense is that the distinction by channels is blurring ever-more every day. There is no monopoly on good advice in any one segment.

But the fiduciary standard for advice and the planning component are most attractive to clients.

Given today’s uncertain economy with high inflation, the Russia-Ukraine war and COVID-19, among other serious issues, how are RIAs best helping clients with planning and investing?

In the current environment, we’ve seen that [clients] are still largely staying the course, which I think is a really great vote of confidence for the value of financial advisors.

In the global financial crisis of 2008-2009, we saw a lot more advisors and individual investors making very strong tactical allocation plans — people selling out of equities, going really conservative.

We didn’t see that kind of behavior in the 2020 COVID crisis. We saw that financial advisors had prepared clients for the volatility that was inevitably to come.

They were focused not on “Did my portfolio drop 20%?” but that they were still on track to retire or send their kids to college.