For many years, financial professionals provided advice on two of the three phases of retirement planning: contributions and accumulations. As a good friend describes, “They showed people how to climb Mt. Everest, not how to get back down.”
The third phase is distribution. Retirement income planning is the distribution process.
The biggest concern among clients about retirement distribution is having their account balance go to zero before their blood pressure drops to zero. To avoid this adverse outcome, many experts make the following suggestions:
Work longer: Clients who retire later will have more years to contribute and accumulate their retirement nest eggs. They will also have fewer retirement years. This idea certainly works–if the advisor can get clients to cooperate.
Withdraw less: This also works, but how to explain to clients that they have to sacrifice their standard of living? Many studies show that taking only 4% withdrawals will allow most portfolios to continue. However, what will the retiree not be able to do during retirement due to a lower withdrawal rate?
Contribute more: Also a good idea. But getting clients to set aside dollars for retirement in lieu of double mocha lattes is a difficult task. What do they want to give up now for satisfaction later? Delayed satisfaction is a tough sell.
Kidding aside, part of a financial advisor’s responsibility is helping clients set priorities. Americans need to save more and put less on credit. Just a few generations ago, banks would offer vacation clubs; depositors didn’t take the trip until they could afford it. What an archaic concept! Today, people even pay for college on credit, creating a generation of up to six-digit debtors before the graduates ever start their independent lives.
Accumulate more: Obviously, this is a good idea, but given the current economy, most clients are spending more time recovering what was lost than adding more.
So, what has been working? Life insurance cash value, in whole life and universal life, continues to increase once death benefit costs are covered. Variable life has not been so fortunate.
Variable annuities, with appropriate lifetime benefit riders, increase the income base. If a client contributes $100,000 to a variable annuity that experiences a 30% decline in investment account value, the fair market value drops to $70,000. However, with a 6% guaranteed minimum income benefit rider attached, the annuity rises in value to $106,000.
This is an interesting time to go back to advisors who told clients that cash value life insurance and annuities cause cancer. Ask them how they feel about these assets now.
What can clients do to recover from a drop in asset values? Depending on the time horizon, they can simply stay the course. This does not mean “Do nothing,” however. Staying the course means continue to rebalance the portfolio consistent with the client’s risk tolerance and time horizon.
Clients need to continue funding their retirement accounts. If the market is down 30%, that means quality purchases can be made on sale at 30% off. However, as with many sales, not everything that is on sale is, in fact, a quality purchase. Hence, the importance of carrying out due diligence when making selections.