From the April 2014 issue of Investment Advisor • Subscribe!

Are Your Clients Getting Their Retirement Checkups?

The distribution phase presents different variables from the accumulation phase

Older clients should get a retirement planning 'physical' at least once a year. (Illustration: Ellen Weinstein) Older clients should get a retirement planning 'physical' at least once a year. (Illustration: Ellen Weinstein)

As clients get closer to retirement, advisors need to turn their attention to not just accumulating and protecting assets, but helping them transition into a new phase of life.

“Retirement is just like your health as you go into your 50s and 60s. You need to have a physical every year,” said John Bucsek, managing director of MetLife Solutions Group, in an interview. “You need to see what you’ve done and where that is taking you.”

For clients close to retirement, there's a significant mindshift that occurs. “We’re talking about that year while making that transition from working to retirement,” Bucsek said. “One of the biggest changes is as an investor. There's a certain psyche when you talk about being in the accumulation phase, and there's a different way that you look at your investments. When I retire, now I’m in a distribution phase. Some of the variables that didn't really affect me in the accumulation phase certainly could affect me in the distribution phase.”

One of those variables is sequence of returns, Bucsek said. “Over the last 25, 30 years, the S&P has averaged around 10%, but very rarely has it gotten 10% in any particular year. If I’m up 18% one year and down 20% the next, then up 30%, if I’m accumulating money, it doesn't really matter because I’m averaging 10%. In the distribution phase, there are two things I know: I know we’re going to have another bear market. The other thing I know is that I don't know when that's going to occur.”

Another variable is longevity. “One of the cool statistics I heard the other day is that the person who's going to live to 150 has already been born. Longevity is really a factor in retirement,” Bucsek noted.

Here, planning for retirement doesn't just involve accumulating assets, but preparing for what life will look like once clients stop working. “It's understanding the three stages of retirement: my very active stage. That's when I could have a part-time job, do charitable work, that's when I’m going to go on that vacation around the world,” Bucsek said. “In the next stage you start to slow down a little; you’re more tied to your residence and you see your family a little more often. The third stage is the stage when you’re very inactive, and statistics are showing that the need for expensive personal care is of great likelihood for everybody.”

Before clients commit to a retirement date, make sure they understand how it will affect their Social Security benefits, Bucsek said. Between the minimum age a client can retire at and the maximum age, “my benefit will grow with an imputed rate of return of over 8%. Where else can I get a guaranteed rate of return of 8% today?”

Furthermore, even if a client delays taking Social Security for a couple of years, life expectancies being what they are, that client could still be taking benefits for 20 years, according to Buscek.

Bucsek also suggested advisors look at their clients’ “sequence of money,” which can introduce a lot of variables to where their income comes from in retirement. “Most people have money that's liquid. Then they’ll have money that's tied up a little bit more, like an IRA,” he said. “I could defer my IRA to 70½, then I have to take minimum withdrawals. Today a lot of people have a qualified plan. The most popular one is a 401(k). Some options are you can take it and roll over the principal to an IRA, or if you leave it here, we’ll annuitize it. You give up your right to principal, but you have an income that we’re going to guarantee for your life or a minimum certain amount of time.”

Bucsek added that it's never too early to start talking about retirement. Advisors can leverage that principal into gaining new clients as their current clients enter retirement, too. Younger generations are having children later in life, he said. “That means your children are going to college later in your life, and that means the time frame that you had to save between the children getting out of college and retirement is reducing.”

He said, “We need advisors to talk to [clients] and to their clients’ children who are in their 20s. We need them to understand that the money they save in their 20s is going to be the most valuable money they have in their 60s.”

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