Helping Clients Dream About Rowing The Boat Gently Down The Income Stream

Most people nearing retirement hope they will be rowing gently down the stream and that their life will be a dream.

Whether that retirement is a few years off or starts tomorrow, one of the most important things advisors can do is help people convert their retirement savings to a retirement income stream. The conversions must be individualized for each client and can be fairly complicated, but the process still generally falls into 3 parts.

First, clients need to have a realistic estimate of how much they have accumulated to fund their retirement income stream. To do that, they need to have a written summary of the worth of retirement accounts, other savings accounts, real estate and any other tangible assets that they own. In addition, they need to have estimates of other sources that will contribute to their income stream, including expected Social Security benefits and payments from defined benefit pension plans.

Having this written summary may be a sort of early warning for some clients that they need to increase their rate of savings for retirement or that their desired retirement date is unrealistic.

If clients retire before becoming eligible for Social Security or pension payments, the income stream early in retirement must be generated from their own retirement accounts. Later in retirement, Social Security and pension payments will flow into the income stream. Real estate typically will not be a source of income until the latter stages of retirement, at which point, a reverse mortgage could generate income or the client can sell a primary residence to fund a move to an assisted living facility.

The second part of planning for an income stream is estimating how much that income stream will need to be. Experts say that retirees will need to have anywhere between 80% to 110% of their pre-retirement income.

The lower figure would be typical of a fairly sedate retirement and reflects savings that would occur if retirees eliminate some of the expenses associated with working such as commuting expenses or hiring others to do housecleaning or yard work that the retirees now can do for themselves. The higher figure would apply to retirees who plan on being more active or pursuing more expensive leisure activities such as extensive travel.

Rather than use generic figures to estimate retirement income needs, clients should have an actual budget based on pre-retirement spending, with any reductions (commuting expenses, for example) or additions (travel, for example) calculated in.

It is particularly important that clients budget for health insurance and health care, because their expenses in this area are likely to be considerable, even if they are covered by Medicare.

Advisors may be surprised to find that many clients currently dont have a budget.

If that is the case, then retirement income planning will benefit clients when they have to put together a budget for their current income and expenses. After clients have prepared their budgets, the future figures should be adjusted for inflation by adding 3% to 4% annually.

Although estimating accumulated retirement assets and retirement spending may have seemed tricky, choosing how best to generate an income stream is even more difficult.

The old adviceuse ones age to allocate accumulated assets, such as a 60-year-old putting 60% into fixed, safer products and 40% into variable, more aggressive investmentsjust doesnt apply. If retirees spend 30 years in retirement, they need to include a larger percentage of investments that will generate a larger return.

The good news is that sophisticated software is widely available for helping clients allocate their assets to match their desired level of risk and return. Most importantly, clients need to be realistic in projecting the rate of return on their nest eggs throughout their projected retirement.

Finally, clients will need help determining how to generate the income stream necessary. Perhaps the most important question regarding a retirement income stream is how much can clients safely withdraw annually without risking they will run out of money.

Unfortunately, no easy answer exists to that question. Plenty of research has been done that indicates that over the course of 30 years, hundreds of variables affect what may be a safe percentage. Perhaps the best overall advice to give clients is to be conservative in estimating how much they can withdraw.

Fortunately, most financial services companies provide a wide variety of planning tools for advisors and clients to use. Those tools can be found on Web sites, in advisor or participant newsletters, or in a variety of publications distributed by financial services companies. In addition, advisors and clients can obtain financial planning software to help them make an inventory of accumulated assets, prepare a current and retirement budget, and project the growth of the retirement nest egg and a safe rate for withdrawing an income stream.

Helping clients determine how much retirement income they need and the best way to generate it is no easy thing. However, it is one of the most valuable services that advisors can perform for their clients both as they approach retirement and as they merrily paddle through their retirement on that income stream.

Kristen Falk, FLMI, AAPA, ACS, AIAA, AIRC, ARA, is a senior writer with LOMA in Atlanta, Ga., specializing in annuities and financial planning. She currently edits texts for LOMAs Fellow, Financial Services Institute program. Her e-mail address is falk@loma.org.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.