“What kind of retirement income do you want?” may be the most important question to ask in retirement income planning.
Why? Because it addresses the crucial emotional component of retirement planning that varies from investor to investor. In addition, it offers a vital context for the inclusion of annuities in retirement income planning that has been sorely lacking. Let me explain.
While a prudent financial advisor would never fail to assess an investor’s risk tolerance in devising a plan for accumulation, few advisors have incorporated a similar process for assessing a client’s risk tolerance for a retirement income.
To the extent that this assessment is ignored, this creates future liability potential that can otherwise easily be avoided.
Why is this important? The answer lies in the new ROI of retirement. In this case, ROI doesn’t refer to return on investment or rate-of-return, but rather, reliability-of-income.
Boomer customers are very much concerned with maintaining the lifestyle they desire during retirement, while ensuring that they not outlive their assets. Focusing on tools that uncover the “New ROI” for each client helps advisors quantify their clients’ fundamental and very personal concerns about reliability of income.
This information can then be used to create a retirement income plan and appropriate product implementation that is tailored to each client’s risk tolerance. Of course, this can’t be achieved without a well-conceived process.
The process begins with the recognition that not all retirement income sources are created equal. For example, certain types of retirement income are guaranteed, such as income from lifetime annuitization and variable annuity guaranteed minimum withdrawal benefits. Other income streams are not guaranteed and are, in fact, contingent upon the attainment of targeted investment returns over decades into the future. These other income streams may include investments in an IRA, a 401(k) or other qualified pension plan.
What percentage of guaranteed versus non-guaranteed retirement income is appropriate for any given investor? And, what targeted rates-of-return should be selected for the component of retirement income that is variable?
Advisors can answer these questions if they use a formal retirement income risk assessment process.