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Retirement Planning > Retirement Investing

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Retirement planning has been mushrooming in the financial services industry. In 1985, a search of “retirement planning” in the LEXIS/NEXIS database drew 75 hits. Halfway through 2005, that same search was on pace to exceed 10,000 hits for the year. In a 2005 Financial Research Corporation survey, Retirement Income Products and Services, 88% of financial services firms considered retirement income solutions “very important” or “of vital importance”–important enough to alter the company’s structure to deal with it. There’s a good reason for this: 43 million of America’s 100 million households will enter retirement over the next 20 years. Which presents advisors and their clients with a problem.

With the first wave of baby boomers set to retire in the next few years, the industry is waking up to the fact that historically it has been overly focused on asset accumulation and investment performance, and is woefully unprepared to handle the appropriate distribution of those assets. Whether it’s juggling the host of new variables that must now be considered, such as life expectancy, assumed withdrawal rates, changing income needs, and healthcare expenses, or dealing with more familiar challenges, such as asset allocation, diversification, and tax control, advisors and investors alike are not ready to handle the retirement planning challenge in front of them for a number of identifiable reasons. Among the most significant are:

Focus The industry is focused on products, performance, and accumulation, not distribution.

Record bull and bear markets Investors are uniquely experienced in both, skewing their view of equity markets and investing in general.

Longevity People are living longer.

A number of factors allowed the industry to ignore retirement planning and remain focused on accumulation. First, until recently, the concept of retirement as something other than an idealistic goal was not very widespread. Second, even if you were lucky enough to actually retire, the odds were against you living very long afterward. Third, the greatest bull market of the last century kept both investors and advisors following the “hot dot.” Who needed to worry about income planning when net worth was doubling every two to five years?

Then, just about the time many Americans were no longer contemplating if they were going to have a vacation home, but rather how many and where, they were slapped with the worst bear market since the Great Depression. These two market extremes created unrealistic expectations at both ends of the spectrum, and neither markets nor investors may have yet fully recovered–financially or emotionally.

Think “Decumulation”

Accumulating assets is only the first part of retirement planning. The next step is to help retirees determine how to convert those assets into income that can last for the rest of their lives. This process is far more complex, and involves a long list of issues, including: longevity, inflation, taxes, healthcare and long-term care costs, growth, asset allocation, liquidity, Social Security benefits, investment guarantees, and market performance possibilities.

A typical question from a boomer pre-retiree might sound something like this, “How much can I spend without running out of money?” Many financial experts conclude that a 4% initial withdrawal rate, adjusted annually for inflation, may be the highest amount that can be withdrawn and still give the investor a reasonable assurance that a properly allocated portfolio can last 30 or more years. Although a 4% withdrawal rate doesn’t provide any guarantees, it is clear that rates above that level can significantly increase the risk of running out of money.

We can accommodate this shift in emphasis by helping retirees protect their assets with sound retirement income planning. Many of the same investment vehicles (mutual funds, annuities, stocks, bonds, CDs and money markets) boomers used to accumulate assets can also be used to generate income. But sound planning is required to achieve an income base that can cover essential expenses while providing access to other liquid assets to cover discretionary spending. As an advisor, you need to work with your boomer clients to develop asset allocation and withdrawal strategies that help determine the percentage of investments they can withdraw each year, and still maintain sufficient income to last throughout their life.

Learn to Think Holistically

It is essential that you help your boomer clients bear the greater retirement burden that has arisen from the shift to self-directed benefit plans. In recent years, more of the responsibility for retirement planning has been transferred away from companies and the government to the individual. Unfortunately, boomers are not especially well equipped to handle this increasing burden. In addition, the old models that are designed to push products onto investors, without first knowing their long-term retirement goals, will no longer work in gaining boomer trust or in developing retirement income solutions.

Since the public needs to be educated about investing and persuaded that advisors can help them plan for their coming retirement, advisors need to build a holistic planning model into all of their contact points with their boomer clients and prospects. Sales presentations, marketing materials, and personal interaction should focus on the advice needed to handle the challenges facing boomers today.

By using an advisory approach that focuses on income solutions rather than on specific investment products, advisors can develop sound income strategies that can see their boomer clients through their retirement years.

Industry scandals that dominated the headlines in 2003 and 2004 have made this transition more difficult. In fact, a recent Merrill Lynch study found that as many as 70% of boomers do not work with a financial advisor. Distrust of advisors may have led many boomers to handle their own investing and retirement planning. Unfortunately for them, research also shows that when left to their own devices, boomers generally do a dismal job of managing and investing their assets.

Consequently, your first job is to reinforce the confidence and trust your boomer clients have in you. Only when your clients are comfortable asking questions like, “How long will I have to work,” “How much will I need to save,” and “How much will I need to fund retirement,” will advisors be positioned to help design customized financial plans and provide clients with a greater level of comfort as they move toward and into retirement.

Greg Salsbury, Ph.D., is an executive vice president for Jackson National Life Distributors, Inc. He can be reached at [email protected].


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