What's Next: Emerging Ideas For Retirement Income

He suggested the answer is to use retirement income portfolios that involve product allocation. “Look at all solutions and have it be product agnostic,” he said.

Suggested products include insurance (life, long term care, etc), annuities (single premium, variable, etc.) and investments (mutual funds, bond/certificate of deposit ladders, structured products, etc.).

Use a back office analysis process to set up the portfolio, Runchey recommended. This analysis should take into account client objectives and risk tolerance, as well as market volatility, inflation uncertainty, health care costs, taxes and other factors, he said. “Also look at what might happen across multiple scenarios.”

The approach has “great mid-market potential,” he contended. The analysis at the backend makes the delivery process more efficient, he explained, “and the client still gets advice.”

To show how the portfolio approach works, Steven Feinschreiber, vice president-research and development at Fidelity Investments, Boston, presented some scenarios. He said that later this year Fidelity will roll out a proprietary system for advisors to use in delivering such portfolios to clients.

Right now, Feinschreiber said, advisors have to do it all themselves, “and that’s expensive.”

To work effectively, retirement income portfolios need to be affordable, effective, client appropriate, size appropriate and reasonable, he said.

The portfolios typically include sizeable allocations of guaranteed income products to fund discretionary expenses as well as to address longevity and market risk, he said. Examples include fixed immediate annuities, guaranteed minimum withdrawal benefits, variable immediate annuities, etc. This is addition to Social Security and traditional pensions.

The portfolios also use products that involve more risk. These are used to cover discretionary expenses. Examples include systematic withdrawal plans, income payout funds, bond ladders, managed accounts, etc.

Funding allocations in the portfolio will vary according to client situation, he indicated.

For instance, unsophisticated investors who are interested in professional management and automatic payments may want a portfolio emphasizing guaranteed income and inflation protection, Feinschreiber said. But sophisticated investors who manage their money themselves, have a high tolerance for risk, and are willing to spend down principal, may want inflation protection but no guarantees.

By comparison, systematic withdrawal plans “are rarely the right solution,” Feinschreiber said. SWPs are simple to use and can work for many years, he allowed, but he said SWP clients risk running out of money in the advanced years, and the plans don’t perform well in periods of extreme market downturn.

Retirement income software. Software to help advisors help clients draw down retirement income is growing in availability and functionality, indicated Michael P. Fitzgerald, senior analyst-insurance practice with Celent, Chicago.

A study his firm did last year found that most of the software targets the mass affluent, but some systems do focus on the high net worth, he said. Most are offered to advisors through their providers.

The Celent study covered systems from 14 software companies. It found that most of the 14 offer functions like these: integration of the income plan with the client’s accumulation plan, incorporation of all sources of income, tax planning features, expense categorization and budgeting.

It also found a few firms offering functions that are still evolving, said Fitzgerald. These include: handling a multi-period retirement, consideration of partial retirement, use of alternative simulations, human capital consideration, and reverse mortgage consideration.

Most vendors believe retirement income software needs to be planning-based, not product-based, he said. Vendors also believe the software should be flexible enough to accommodate scenarios, content management and document management; and should be able to support ongoing monitoring and progress, he said.