Summary
SLI: The Secure Lifetime Income (SLI) is incorporated into a portfolio to offer fixed annual payments, reducing the client’s planned withdrawals.
Recalibrated Allocation: After SLI is purchased, the portfolio allocation is adjusted to maintain equity investments while reallocating bonds to fund the SLI purchase.
Risk Scoring: Risk scoring includes the SLI as a zero-risk asset, resulting in reduced or unchanged overall risk scores for the client’s total position.
Introduction:
This document provides an overview of how SLI is treated in the financial plan. We first explain how the SLI is purchased and how we compute the recalibrated portfolio allocation. We then proceed to explain how the risk scoring is done and discuss how all of these are implemented in simulations and how they could be implemented in real life.
Original Portfolio Allocation
The original portfolio allocation represents the client’s recommended model portfolio based on their risk tolerance and financial goals before incorporating SLI.
Recalibrated Allocation
When SLI is purchased, the portfolio allocation is recalibrated to reflect the reallocation of assets:
SLI Purchase: Funded from the fixed-income portion of the portfolio.
Equity Preservation: The monetary value invested in equity remains unchanged after the purchase.
Example Calculation:
For a client with a £100,000 portfolio (50% equity/50% bonds) purchasing £20,000 in SLI:
Portfolio value reduces to £80,000, while total position remains £100,000.
New allocation:
Bonds: (50%×£100,000−£20,000)/£80,000=37.5%
Equity: (50%×£100,000)/£80,000=62.5%
This approach ensures that equity investments remain consistent, maintaining the client’s risk level while accommodating the SLI purchase.
Risk Scoring
Timeline's portfolio risk scoring evaluates two dimensions:
Higher-Risk Asset Percentage: Reflects exposure to equities.
Portfolio Volatility: Penalizes lack of diversification.
Integration with SLI:
The total portfolio risk score includes SLI, treated as a 0% risk investment (similar to cash).
The overall risk score after SLI inclusion will be equal to or lower than the original score.
Edge cases: For portfolios dominated by fixed income or requiring equity to fund SLI, risk scores may adjust to reflect improved diversification and lower volatility.
Stress testing the financial plan using Timeline Planning.
In the Liquid Assets section, you can select the desired original model portfolio for the client, and you can select the % of SLI purchased:
The allocation that is used at the beginning is the recalibrated allocation (the one with the increased equity portion), which then naturally drifts based on the sequences of returns of each monthly rolling scenario until it is rebalanced based on the selected periodicity.
To understand the impact of SLI on sustaining spending over a long horizon, you can start with a specific model portfolio, save it, and then duplicate it to include SLI. In the following example, we show a balanced £100,000, 50/50 global portfolio with £4,000 inflation-adjusted annual planned spending. You can compare the two plans, with and without SLI, to understand the impact.
For a more detailed comparison between the two, you can use all the available charts and tools in Timeline planning. The above picture only shows the difference between the two plans (SLI and no SLI) in terms of the Success Rate and Legacy.
Conclusion
Integrating SLI into financial planning through Timeline offers clients a robust strategy for sustaining long-term spending while mitigating risk. The recalibrated allocation approach ensures equity investments are preserved, and holistic risk scoring reflects diversified portfolios.
Backtesting demonstrates the resilience of financial plans under varied scenarios, highlighting the potential for SLI to improve success rates and financial outcomes. By leveraging Timeline’s tools, advisors can confidently implement SLI to meet client needs effectively.