What is the Farrell-Northstar Retirement Income Index (FNRI Index)?

Let’s say you’re on the verge of retiring and you’ll soon need to figure out how to live off the returns on your money.   For decades, retired investors have basically assumed that the price of their investments would go up, and they would simply sell assets to produce cash for distributions.

But what if you enter into a long period where the value of your investments doesn’t increase?  We have just gone through a 10-year cycle where the price of the stock market actually declined.  And we have been through these periods before. Between 1966 and 1982, the price of the Dow Jones Industrial Average basically didn’t increase.  And in Japan, the price of their stock market has fallen for over 20 years.

If you want a higher level of financial security in retirement, you need a strategy for producing income even if the value of your investments isn’t growing. Otherwise, you’re simply hoping that the price will go up before you run out of money.  And a strategy based on hope isn’t very sound. You need to start thinking differently about how you manage your money once retired.

Figuring out how to produce consistent and growing income throughout your retirement years should be your top priority.  If you have income, then the price movements can be largely ignored.  You can simply live off the income until prices recover.  And because price declines can last for a decade or more, you need a strong income stream to carry you through those types of cycles.

We developed the Farrell-Northstar Retirement Income Index to help investors gain a better understanding of how to combine specific investments to produce income and protect principal in retirement.  The FNRI Index is comprised of securities that are designed to help investors meet the following investment objectives:

1. Current and Stable Income
2. Growing Income
3. Principal Protection
4. Capital Gains

The indexobjectives are listed in order of priority and importance, and securities are selected for the index based on their likelihood of meeting those objectives. For instance, having a stream of stable income for the next year is more important to a retired investor than the potential for capital gains 20 years from now. But capital gains are a necessary component and must be incorporated into the index objectives.

For decades, investors have been benchmarking their portfolios against broad market indices like the S&P 500. While broad market indices are appropriate for investors with long-term time horizons and no need for consistent distributions, they are of little value to investors who must live off the returns on their capital.

Other indices are not structured to reflect the unique investment objectives for investors who need to live off their money, and thus do not serve as appropriate or helpful benchmarks for retirees.  For instance, during this most recent financial crisis, the S&P 500 was down more than 55% at its low in March 2009. If an investor’s portfolio was down 54%, he or she could have taken pride in beating the index, but that result would most likely have proven disastrous for a retired investor.  Thus, retirees and their advisors should consider new benchmarks and portfolio structures that reflect the objectives of those who must live off the returns on their capital.

What does the orange chart area mean?

The orange area represents the return associated with the income component from securities in the index.  This income is generated by bond interest payments and stocks' dividends, and for purposes of the index those income returns are reinvested.  For retired investors, this income is available for distribution to meet living expenses.  The orange graph is meant to help illustrate how the return from the income component can grow over time, which translates into the potential for a growing income stream in retirement.

What does the blue chart area mean?

The blue chart area represents the price of the index.  Because it doesn’t include the income generated by interest payments and dividends, it does not represent the total return.  It is simply a measure of the price of the underlying securities.

Our index returns are certified by Standard & Poor's, and we receive a daily report on the price of all the securities in the index and any income generated by those securities in the form of interest and dividend payments.

 

 

Disclosure: The Farrell-Northstar Retirement Income Index is a list of fixed income and equity securities. The FNRI Index is for informational and educational purposes only. Investors cannot invest in an index and the FNRI Index does not represent an actual security or portfolio. Equity statistics are estimates and were obtained from Ford Equity Research for each individual equity holding in the FNRI Index. Historical dividend payments on the S&P 500 were obtained from Standard & Poor’s. Statistics for the master limited partnerships and energy trusts are excluded from the PE calculation as those securities have different financial structures that need to be analyzed under different valuation metrics. Past performance is no guarantee of future returns. FNRI Index returns have been certified by Standard & Poor's. Consult your individual financial advisor prior to making any financial decisions. Investing involves multiple risks, including but not limited to the permanent loss of capital.