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Retirement Planning > Spending in Retirement > Income Planning

Some Advice On Giving Income Planning Advice

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Many retirement-minded clients are not asking for education on retirement income or wanting to read a book on the subject. What they want is “advice on their specific situation,” said John P. Wesley.

A product manager at TIAA-CREF, New York, Wesley was moderating a panel on income advice here at the Retirement Income Conference sponsored by LIMRA, LOMA and Society of Actuaries. TIAA-CREF recently launched an advice program that combines one-on-one meetings with managed accounts.

The panel looked at two examples of how advice is being handled right now.

This entails talking to clients about retirement, helping them through it and then helping them afterwards, too, said Patrick Kennedy, vice president-wealth management at TIAA-CREF.

Many people today, even the more conservative academics, are unprepared for retirement, he said. Many did save, he added, but they still are not prepared.

For instance, they are not prepared for facing uncertainties such as rising health care costs, failing pensions and Social Security’s future. Neither do they know about sustainable withdrawal rates nor asset allocation for retirement.

This is where advice comes in, Kennedy indicated, saying advisors should talk with clients about these issues. Show them graphs that illustrate how more aggressive investments and higher withdrawal rates will lead to less successful outcomes and what happens with lower withdrawal rates, etc. Also, talk about the impact of volatility on systematic withdrawal, and what (could happen to the portfolio) if the market tanks in the early years of retirement, he said.

As for annuitization, “affluent clients are less likely to require it,” Kennedy said, explaining these clients tend to prefer systematic withdrawal’s flexibility in amounts and frequency of payments.

On the other hand, the less affluent clients desire and need a safety net, he said. They need a level income that will not run out before they die. In those cases, he said, “we talk about annuitizing to the need and locking in the amount for inflation, using the right tools.”

The retirement income discussion covers pros and cons of annuitization, too.

On the pro side, he points out how partial annuitization, compared to no annuitization, “reduces the portfolio failure rate,” and annuitization reduces the risks associated with market volatility. He also discusses how it provides a greater payout for retirement income than does a bond portfolio with the same starting value.

As for cons, Kennedy notes that, if early death occurs, this essentially eliminates that part of the estate. Annuities are also more inflexible than securities, have payout rates that are “too low right now” and don’t allow diversification, he added.

Still, some annuity products do have flexibility, he indicates. For instance, some variable income options offer gradually increasing interest rates, he said. Others have graded payments, based on performance of a given fund and subject to a guaranteed minimum. And, lifetime annuitization can be used to mitigate longevity risk, be structured to grow to combat inflation, and be used to cover basic needs in a plan that provides for more annuitization later on.

Clients can combine methods, too, using partial annuitization for income security, and systematic withdrawal for flexibility and liquidity, he said.

In the advice setting, clients need to know their goals now and in the future, said Patrick R. Buchanan, a senior financial advisor with Buchanan and Goldstein, a Lake Mary, Fla., financial advisory practice of Ameriprise Financial Services Inc.

If clients write down their goals and seek those goals, he said, they “do better.”

At his firm, discussions with clients focus on how to prepare for the “certainty of uncertainty.” A large piece of this entails alleviating the fear clients may be feeling about the possibility of living 40 years in retirement, he indicated.

It’s not about intellectual or technical intelligence, Buchanan stressed. “It’s about emotional intelligence….If you get to that, you’ll have greater success.”

For the advisor, that means finding the client’s emotional competency and expanding from there. He said he covers what people can’t ever know (what the market will do, etc.), what they can count on (e.g., change, etc.), and how they can plan around goals and “throw off discouragement.”

Do the asset allocation first and then the income strategy, working to fill the gap between essential and discretionary expenses, he suggested. As for annuities, they are “a fail-safe for the client who is paralyzed with fear,” he said.

Like an airplane, the plan needs constant control and direction, he added.



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