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Retirement Planning > Spending in Retirement > Income Planning

Building An Income Plan Requires The Right Financial Tools

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If you’re building a house, you need the right tools. And, if you’re constructing an income plan, the same holds true, say financial advisors. Certain financial products and features make it more likely that an income plan will have a solid foundation, they say.

For example, a combination of immediate and variable annuities can be the right mix, says Darlene Simard, a certified financial planner in Manchester, N.H.

A portion of available funds would be used to set up an immediate annuity with another portion used to establish a variable annuity with a guaranteed minimum income benefit, says Simard, who represents MassMutual Financial. If the guaranteed minimum income benefit is at 5%, then the client’s balance would be growing at 5% or the market value, whichever is higher, Simard explains. Hopefully, the growth would be greater than the minimum guarantee, she continues.

The strategy is good for a client who has not saved a lot of money, she adds, because it protects the client from market declines such as the one in 2000-2002. “No one wants the market to drop when they need the money,” she says.

Experts are predicting that double-digit market growth of the 1990s will not continue going forward and that withdrawal rates will need to be in the 4% range, according to Simard. “That’s pretty low. It’s not what everyone is used to.”

Consequently, it is important to have both income and growth features in the income plan, she says.

Another tool Simard finds helpful is not a product feature but a detailed description of actual spending. “What do you pay for electric and in golf fees?” she will ask the client. Very specific information is needed “to know that the income plan is real.”

Single premium annuities and dividend paying stocks are among the tools that Neil McCarthy, a certified financial planner with N.J. McCarthy & Associates, Roswell, Ga., says he finds helpful when developing an income plan. The single premium annuity locks in yield. For instance, he says an annuity that provides income for life for a male age 65 can yield 8% compared with a fixed yield of 4.5%-5%.

Variable annuities are products that McCarthy says he tends to shy away from because of their fees.

With an SPIA, however, the upfront commission cost average is 3.5%; he says studies suggest the cost is less than 50 basis points, or a half percent a year, when amortized over the 15- to 20-year payout period.

Exchange traded funds (ETFs) provide a good way to participate in the market at a low cost, McCarthy adds, noting that cost is “really important” when designing a stream of income for a client. If an advisor is anticipating helping a client provide a 4%-5% withdrawal, then an eye to cost can help an advisor provide a cash flow nearer to 5%, he says. A typical income plan might consist of 40%-50% of assets in an immediate annuity for immediate cash flow and the remainder in a portfolio of ETFs or no-load index funds to provide asset and income growth over time, he suggests.

Because of the need to obtain yield and lower volatility, McCarthy says he focuses “more on value rather than on growth funds.”

A mix of dividend paying stocks and debt instruments are the income planning tools of choice for Grant Brown, a certified financial planner with Raymond James in Dallas. Debt instruments can include both government and corporate bonds, he adds.

If he did recommend an annuity for an income plan, Brown continues, it would more likely be a fixed annuity (to avoid the fees associated with variable annuities). In addition, Brown says, a Depression-era mentality makes many of his older clients more risk averse and more prone to favor features with guarantees. But with younger clients, this is less likely to be the case, he notes.

Because of concern about the safety of the investment, Brown says he recommends buying ‘AAA’ rated municipal bonds.

But finding safer investments with a decent rate of return is currently a problem, he continues. Even with VAs, he says, over time, guarantees have dropped to the 3%-4% range from 7.5%, so costs and fees become more important. A typical VA has a 2.5% charge compared with .75% for a mutual fund, Brown says.

Dollar cost averaging is another tool that Brown uses for income planning. It is more efficient on a cost basis than buying low and having a high basis at distribution.

At least as important as any product feature out there, according to Brown, are 2 questions that frame any income planning work: when and how often the client wants the income? Answers to these questions help the advisor ladder an income planning portfolio, he says.

Two planners associated with the Alliance of Cambridge Advisors, Highland, Mich., offered tools they feel are valuable in creating an income plan. Cambridge is an association of financial advisors that works on a fee-only basis and focuses on life planning.

Rebecca Preston, a certified financial planner with Preston Financial Planning, Providence, R.I., says she uses bond ladders comprised of Treasuries to feature safety. When maturity is reached, she adds another rung to the bond ladder, Preston says.

Clients are more concerned about the security of investments than simply yield, says John Discepoli, Discepoli Financial Planning, Glendale, Ohio. Discepoli also uses bond ladders designed from Treasury strips to create an income plan that he says respects a client’s risk level and produces income. Returns can be increased by purchasing a zero coupon bond that will be held to maturity, he continues. “Clients are very secure knowing that they have government securities,” Discepoli points out.

Discepoli also encourages clients to save 10% of their income even in retirement. This is a Cambridge tenet that he uses in his own practice.

Although Discepoli does not recommend using variable annuities, he says many clients already own them when they come to him. When this is the case, he says he takes the total amount of income needed, reduces that amount by the amount the VA produces and creates a bond ladder that generates the difference.

If possible, he places the fixed income portion of the portfolio in a Roth or traditional IRA for tax purposes, he adds.

Discepoli also uses ETFs and index funds for the equity component of a client’s portfolio.

This article was originally published in the August 2005 issue of Income Planning, an online publication of National Underwriter Life & Health. You can subscribe to this e-newsletter for free by going to

Answers to the questions of when and how often the client wants the income will help the advisor ladder an income planning portfolio


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