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Creating Income for Life

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With an estimated 78 million baby boomers poised to retire over the next 25 years, financial advisors face widespread challenges meeting the needs of this burgeoning population. Just as this generation has determined the nation’s social agenda for the past 50 years, so will it now redefine our understanding of retirement and the aging process. Among the most significant demands this will place on advisors is how to find ways to help retirees select methods for generating safe, predictable income for a protracted period of time not seen in previous generations.

In fact, a “perfect storm” — with low interest rates, volatile stock markets and unprecedented longevity as its major components — has emerged over the last few years. As fewer employers offer defined benefit plans, retirees no longer have the luxury of counting on guaranteed pension income to supplement Social Security and personal savings. Meanwhile, the inability of politicians to address issues related to the long-term solvency of the Social Security system raises doubts about the sufficiency of the average person’s nest egg.

Adding to these complications is the often-held perception that the typical person does not need the services of professional financial advisors when planning for retirement. A recent study by American Financial found that roughly 56 percent of the affluent population surveyed (all participants made $70,000 a year or more) simply don’t utilize the services of financial advisors for their retirement planning needs. This attitude may have been permissible for previous generations when life expectancies were shorter and pensions guaranteed one’s income in retirement. Today, given current complexities and the irreversible nature of most decisions related to retirement distributions, it is no longer appropriate.

The typical retail investor also fails to understand that retirement accumulation strategies are inherently different than the tax and investment strategies that will eventually become necessary in the creation of a sound retirement distribution strategy. As advisors, it is part of our job to sound the alarm and help America’s largest generation find their way safely through their retirement years.

Challenges Facing Advisors

Given the sheer demographic weight of this population and the challenges confronting it, financial advisors have shown increasing interest in reexamining strategies for addressing retirees’ need for safe, predictable income. This sense of urgency was exacerbated by the long bear market of 2000 to 2002, when clients and advisors alike got a close look at the shortcomings of strategies such as “constant percentage,” “constant dollar amount” and “dividend only.” As the value of equities declined, those using the first two methods realized either a reduction in income or a steady erosion of principal. During the same period, interest rates declined, reducing income that retirees could derive from traditional fixed-income securities as well as cash products like CDs.

For those in or entering retirement during this period, discussions concerning “reversion to the mean” and the long-term advantages of asset allocation were often drowned out by the fear that maybe this time it truly was different and equity markets would decline indefinitely.

Since then, the financial industry has seen a proliferation in the number of ways advisors can help their clients set up retirement income streams. There is the single product solution, in which the investor solves all needs for future income and growth by purchasing a product such as a variable annuity that carries an income rider. Some strategists have taken to advocating the systematic withdrawal approach, in which the advisor creates a diversified portfolio and the client takes income on a pro rata basis. Once a year, the portfolio is rebalanced into its original allocation percentages.

The final school of thought — represented by national recognized authorities such as Phil Lubinski, Paul Grangaard and Ray Lucia — divides the retiree’s life expectancy into segments and selects different investments for each segment based upon the need it is designed to address.

The Income For Life Model

A proprietary version of this third strategy called “The Income for Life Model,” has been developed by software company Wealth2k in conjunction with Phil Lubinski, CFP. This system is an uncomplicated money management solution that enables retirees to turn a portion of their savings into income that they can then depend on throughout the course of retirement. The core of the model is a forward view of a retirement period that runs 25 years or more; the system then incorporates asset allocation and strategic investment recommendations with the objective of providing a lifetime of inflation-adjusted income.

Using this design, deposits are allocated to six “segments” that hold assets with risk profiles ranging from very conservative to aggressive. Segment one, representing the most conservative investments, receives the largest deposit. Successive segments receive varying lesser percentages, eventually totaling 100 percent of deposits. Segments receiving smaller deposits are those which hold progressively more aggressive assets. Naturally, the more aggressive an investment, the more risk to which it is subject, but the greater its potential upside may be. Assets in all segments will be held for the longest period of time possible in hopes of achieving higher returns while potentially reducing market risk.

Initially, the model provides a guaranteed income strategy by utilizing a single-premium immediate annuity, bond ladders or banking products for a period of 60 months. For each subsequent five-year period, additional segments are converted into a guaranteed income strategy, each paying out over the 60-month period. Should the assets held in the various segments realize their projected rates of return, they should make sufficient money available to implement guaranteed income strategies in amounts capable of providing an increasing level of retirement income.

Of course, all six of those five-year periods add up to a 30-year retirement. The sixth segment is viewed as a hedge against the individual living beyond 25 years from the date of inception, or beyond age 90 if retirement begins at age 65. If that last segment meets its projected rate of return, it should hold sufficient assets after the 25-year mark to continue an income stream. At death, if there are any remaining assets, they pass to beneficiaries.

Using historical Ibbotson returns and Monte Carlo simulations run by Securities America, the Income for Life Model has an 87 percent probability of achieving its targeted results over a 25-year period. The reliability of returns in this model is particularly important, given that inflation threatens to diminish the savings of today’s retirees. Over the past 30 years, the consumer price index — a key inflation indicator — increased by an average of 4.6 percent a year, according to data collected by the Federal Reserve Bank of Minneapolis.

Furthermore, with an estimated 95 percent of employees currently electing to take lump-sum distributions from their 401(k) accounts when they retire, tomorrow’s retirees need an alternative system for ensuring their savings last over the course of their retirement. The Income for Life Model and similar strategies give retirees the ability to convert their savings into a predictable, steady income stream.

Given the vast size of this emerging market and the complexities involved in providing for the financial needs of the baby boomers in retirement, debates concerning distribution planning will continue at the forefront of discussion within the advisory industry. However, at some point, advisors will need to commit to one methodology over others. In Phil Lubinski’s words, “Even though circumstances differ you have to be consistent in your methodology and philosophy with each client. Otherwise it is like trying to practice two religions simultaneously.”


Marie Swift is president of Impact Communications, a marketing and communications firm for independent advisors; see

John Barton is a certified financial planner with Securities America.