Building Retirement From Floor to Ceiling

By Richard Ford and Steve Hanson

Will your clients’ retirement savings last a lifetime?

Most advisors in the 403(b) market have long been focused on helping their clients save for retirement. As clients approach retirement, however, many advisors feel ill prepared to help clients with a new set of questions such as:

  • Will the retirement income I’ve saved be enough to cover basic living expenses?

  • Will I have enough money to travel, pursue a new hobby, or cover unexpected expenses?

  • Will I be able to leave assets to my heirs?

  • How can I invest my nest egg for continued growth while protecting it from market volatility?

  • How can I make sure my savings last my lifetime?

Going forward, successful advisors will not only be able to help clients save for retirement, but will also be prepared to help clients transform their savings into a reliable source of income that will last throughout retirement.

Different People, Different Dreams

Gone are the days of the “one size fits all” retirement. Today’s retirees have better health and longer life expectancies. They stay active and want to be able to leave a financial legacy and contribution to society. Retirement is now the opportunity for re-engagement: new career, back to school, part-time job, volunteering.

Gone also are the days of a single-product solution. What has emerged is the need for financial advisors to adopt a process-oriented approach and use an entire suite of product solutions. The new theme in retirement income planning is to first build a base of guaranteed income before exposing the client’s assets to market upside potential.

How large does the guaranteed income base need to be? It depends on the client’s individual circumstances, but nearly all retirees will have some need for a portion of their income to be guaranteed.

Retirement, More than a Lifetime Paycheck

As more workers take their retirement savings in lump sums, the challenge of converting these savings into a regular stream of income is a critical issue for the U.S. retirement system. Many retirees must structure plans to meet current expenses as well as finance potentially long life expectancies and ballooning health care costs. Simultaneously, they need to be able to tap their assets for unpredictable expenses such as out-of-pocket medical and long-term care costs.

Balancing Performance, Risk and Cost

Retirees seek an investment strategy — a retirement income framework — with a balance of performance, risk and cost that is suited to their unique circumstances.

Performance is no longer simply a measure of return on investment. Rather, it includes three broad income and asset-based objectives important to retirees, namely:

  • Generating a regular income for predictable or regular living expenses

  • Meeting discretionary or unpredictable spending needs, including out-of-pocket health care or long-term care costs, unexpected housing or transportation expenses

  • Providing bequests to survivors, heirs or charities

Although the emphasis on each of these objectives will vary by individual, all three typically play some role in the decision process.

Risk mitigation is another important element. Individuals living in retirement face investment, inflation and longevity risk. Negative returns, especially early in retirement, can derail your client’s income plan. Inflation can’t be avoided and even with 2 percent inflation, a dollar loses about 40 percent of its purchasing power over 25 years.

Unique to the distribution phase is longevity risk: the risk of spending savings too quickly and depleting assets prematurely. The challenge in managing longevity risk is to balance spendthrift tendencies against excessive frugality.

Costs for retirees come in three types: investment costs, guarantee costs (providing protection against the market, longevity, or other risks) and taxes. Higher costs generally reduce an individual’s ability to achieve his or her goal for a given level of risk, while lower costs enhance an individual’s probability to exceed his or her goals.

The Planning Process

How can advisors help clients address these issues? The answer is to adopt a disciplined approach that places an emphasis on process, not product. If you follow a disciplined process, you will build trust with your client and be better able to assess your client’s needs, and the product solutions will evolve naturally from the process.

Step 1: Quantify and categorize anticipated retirement expenses

Use a budget worksheet that categorizes retirement expenses into three separate categories: essential, important and discretionary. Essential expenses are housing, utilities, food, health care and taxes. Important expenses are clothing, transportation and insurance. Discretionary expenses are items such as travel, hobbies, entertainment and gifts.

Step 2: Identify and quantify known and reliable income sources

Income sources include Social Security, state or corporate pensions, employment income, rental property income, and any other sources that can be considered reliable.

Step 3: Quantify assets earmarked for retirement income generation

Important for the advisor is to identify known client retirement assets including: 403(b), 457(b), 401(k) workplace retirement accounts, IRAs, non-qualified investments, home equity, inheritance, and other investments. It’s essential that clients put all their cards on the table so you can effectively help them.

Step 4: Assess the client’s income variability tolerance

This step is critical and can be difficult because it’s more of an art than science. A questionnaire is helpful in developing a plan that they can live with and stick to over the long term.

Step 5: Product Allocation – determining the appropriate mix of products and strategies to meet the client’s needs

Remember, a single product solution likely won’t work in today’s retirement paradigm. A guiding principle is to build a guaranteed income floor. Your client’s assets have a new job to focus on: generating income, not generating return. There are numerous guaranteed and non-guaranteed products to fill the gap in product allocation, including:

  • immediate or deferred income annuities

  • variable annuities with guaranteed lifetime income riders

  • fixed indexed annuities with lifetime income

  • managed mutual fund portfolios deploying systematic withdrawals or a time segmented withdrawal strategy

In conclusion, individuals and advisors face the challenge of integrating newer and traditional strategies into a personalized retirement income plan. The right approach ultimately depends on the same principle that governs investment decisions in the accumulation years — the need to strike a careful balance between return, risk and cost.


Richard Ford is chief marketing officer and Steve Hanson is vice president of product development for PlanMember Services Corporation based in Carpinteria, Calif.

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