FPA Retreat: Peng Chen, Henkel Explore New World of Retirement Income Planning

Pair joins Kelli Hueler, Dr. Michael Zwecher for talk on sources, strategies for retirement income

Envestnet/PMC managing director Michael Henkel hosted a panel discussion Wednesday at the FPA 2011 Retreat in Bonita Springs, Fla. that centered on the thorny question of achieving a secure stream of retirement income in a post-2008 crisis environment.

Morningstar Ibbotson president Peng Chen, Ph.D (left) began by advising the advisors in the audience to think of the retirement income question in terms of the client’s personal balance sheet by understanding assets versus liabilities.  

“Determine how much market risk can be taken and the longevity risk they must protect against,” Chen said. “Then think about how much income they can take. By this I mean you should look at their income level and the risk around income rather than a return level and risk around that return. It’s a whole different way of thinking about the income challenge.”

Kelli Hueler, CEO of Hueler Companies, then began a discussion of the costs and benefits of annuities in getting required retirement income. Hueler included a list of “must-haves” in order for annuities to be successful in addressing the challenge. Chief among them was complete transparency in the fee structure, institutional pricing that discloses all fees related to a product’s distribution and product standardization that allows for apples to apples comparisons.

“When it comes to annuitization, you should throw out the notion of a onetime conversion to income,” she said. “It should be part of a process about building retirement income, one that takes place over time. And just as you should not make only one decision to annuitize, you should not have only one issuer in the client’s portfolio. Competition is a good thing, and having them compete within the portfolio is good as well.”

Hueler wrapped by noting longevity, for all the problems it brings, is still a gift in this country, but one that is expensive.

Author and researcher Dr. Michael Zwecher then spoke about the difficult conversations advisors must have with clients surrounding retirement income. He also offered specific solutions, including bond laddering and noted the retirement income question is not about wealth, but rather consumption levels relative to that wealth.

“I have a neighbor who made $17 per hour when he retired with is pension,” Zwecher said. “He takes his vacations at the Jersey shore and has simple needs. He’s doing alright. I have another neighbor who makes $500,000 per year, and spends about $505,000. He is much more constrained, and even though he makes so much more, he has no capacity to absorb an income shock.”

Zwecher related retirement income planning to the landing of a plane on an aircraft carrier; if the advisor comes in too high, he’ll be all right. If he comes in too low, it will hurt.

“Living to age 85 is no longer an end, it is the median,” he said. “If you plan to age 85 and it’s perfect, then great. If not, half of your clients will be dead and the other half will be very angry. It will be the advisors who do this right that will win, and they’ll also benefit from mopping up for the advisors who didn’t do it right.”

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