If you’re in the financial services business and meeting and speaking to people about some form of financial planning, you get to have conversations and witness myriad planning perspectives that have been put into place. One planning strategy that we repeatedly see is when an advisor takes a client from the accumulation phase and then to the distribution phase, where income is distributed at retirement in a range of 3 to 5 percent of the portfolio value.
With this planning method, it’s essential to protect the principal value from going down – something that is obviously tied to the income one receives in any given year. Because this type of planning – which keeps clients positioned and dependent on risk – has dominated the income planning landscape, in this last recession, many people who are now in their 60s and 70s lost huge amounts of money they planned to use as retirement income. Those already in retirement saw their incomes slashed by 40 percent because the planning to which they subscribed did not protect the money they were planning on using for income. These people have experienced a depression – not a recession.
When your clients subscribe to income planning that keeps them a slave to principal protection, the planning has really come to a halt. What more is there to do but find various places for their money to accomplish this goal and keep track of fees, commissions, and costs along the way? The problem is that we are in a very low-interest rate environment, and finding a guaranteed 3 to 5 percent return can be difficult and potentially expensive, and will most likely keep clients positioned in risk.
Is this a bad way to go? Absolutely not – if the income that your client plans to receive is removed from this part of the portfolio. Knowing the risks, it is astonishing that there are not more formal income plans established around immediate and deferred annuity planning. Consider the following scenario.
Not slaves to principal planning strategies
As of this writing, the 10-year government bond pays 3.38 percent. That means that, to guarantee a $33,800 income for a 65-year-old male isn’t taxable, he would have to commit $1 million without flexibility to withdraw the par value of the bond for a 10-year period.