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Retirement Planning > Retirement Investing

Eliminate the guesswork from retirement planning

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When asked what makes them nervous about the stock market, most clients equate stocks with their income for retirement. That way of thinking amounts to “income guessing,” not income planning.

The financial professional’s role is to help clients remove the guess-work from retirement planning strategies and build confidence in funding both their short- and long-term goals. Those professionals who guide clients through the seven sources of retirement income, and the related potential tax implications, can add greater value to the process. Here are some points to consider.

Controllable versus non-controllable: The professional needs to assist clients with issues relating to basic income needs. This can be done by helping them understand controllable expenses, such as entertainment, hobbies, and vacations, and non-controllable or survival expenses, including food and medicines. This distinction can build flexibility in retirement strategies.

When clients can breathe a sigh of relief that their non-controllable expenses are met, they can take the appropriate risk for expenses they can control.

Visual appeal: Most clients are visually oriented, which makes for the biggest challenge for financial professionals in presenting retirement strategy proposals. Many times, the proposals offered to clients are multiple pages with many moving and confusing numbers.

A retirement planning program should provide a visually appealing way for clients to understand the complex issues involved in retirement income planning before they focus on the numbers. The program should help them understand how income in retirement is not just the opposite of accumulation for retirement.

Seven sources: As mentioned above, financial professionals also need to help clients understand the seven sources of retirement income, including:

  1. Social Security, the base for most clients
  2. Employer-sponsored retirement plans or pension plans
  3. Traditional IRAs
  4. Roth IRAs
  5. Nonqualified plan assets
  6. Continued employment or phased retirement
  7. Welfare or charity

Getting clients to recognize these seven sources is key, as it is a departure from the traditional retirement model to which they may be accustomed. The traditional model typically identified only three sources–Social Security, pension plans and investments such as traditional stock market funds–with each contributing approximately one third to the retirement fund.

Given the uncertain future of Social Security, the disappearance of pension plans and the recent stock market declines, people are looking for new strategies to help guarantee their retirement income.

This “new normal” for retirement balances liquidity, volatility and rate of return. Now more than ever, clients are interested in principal protection as a major component of their retirement strategy, even if that means they’ll only enjoy moderate increases during market highs.

As such, they should understand that within these seven sources come a variety of financial options, such as annuities, which they should consider in meeting retirement income goals.

Guarantees and annuities: When guarantees are important, an annuity can often be a solution in income planning strategies. Although sometimes criticized for their conservative nature during good economic times, many variable annuities provide a guaranteed income option. And fixed annuities provide fixed rate options that can protect against market volatility.

(Producers must be registered with a broker/dealer to recommend the liquidation of retirement funds to purchase an annuity.)

Annuities can provide a stream of income for the clients to cover their survival needs for the remainder of their lives. Annuities may also help to remove the “guessing” from clients’ retirement planning, giving them control and comfort when reviewing the non-controllable needs of retirement.

This is key in retirement income planning. Due to recent economic conditions, many clients are now more concerned about reliability of income than return on investment. The annuity offers a solution. But a retirement income planning program should help guide their understanding.

Knowing the sources is not enough: Each of the 7 sources of retirement income has tax and penalty consequences that clients must understand. While these sources may seem confusing and complex for clients, the financial professional must stress the importance of managing the taxes, as well as the sources of their income.

For example, a decision to move to an individual retirement account before age 59 1/2 or to do a Roth conversion has to be part of the solution-based process.

When helping clients navigate retirement income planning issues and decisions–Social Security, the impact of ERISA plans, whether to use an IRA or Roth, and whether to work in retirement–the financial professional must communicate the idea that retirement income is not simply the reverse of accumulation.

Clients will learn the importance of both managing the sources of their retirement income and the tax considerations that will ultimately help them determine which assets to move first, next and last.

Jim Johnson is vice president of advanced markets at Allianz Life, Minneapolis, Minn. His e-mail address is [email protected]


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