All their life, over and over, your clients probably have heard a familiar chant from family, friends, co-workers, financial institutions, the media and others, admonishing:
“Save for retirement! Save for retirement!”
Good advice, without a doubt. And guidance that compelled many to set aside hard-earned dollars in preparation for tomorrow. But what happens when tomorrow comes? When they actually reach retirement? It’s likely no one ever urged:
“Prepare a retirement distribution plan! Prepare a retirement distribution plan!”
Planning for how to tap assets in retirement is equally as important as accumulating them in the first place. As a financial professional, equip yourself to help clients understand that many of the issues confronted in the distribution phase will vary from those faced during accumulation. Consider some examples:
- Draw down. The risk of withdrawing too much too soon from retirement assets can create an unsustainable rate of reduction. The result: Quicker depletion and lost opportunity to keep assets working in pursuit of further growth. Conversely, withdrawing too little too late also poses a risk. It may mean clients work longer than needed, or constrain their lifestyle more than necessary.
- Income gap. When the security of an employer-provided paycheck disappears, what may emerge is a gap between income and expenses. Your client’s choice then is either to bridge that financial gap or make tough choices about which elements of their standard of living to sacrifice.
- Health-care outlays. Costs in general tend to rise over time. Health-care expenses are no exception. Health concerns typically hit your clients most in retirement, because they are older. As clients age, they grow more exposed to the increasing cost of health care and more likely to experience its impact. It’s a fact of life, but thankfully one which they can anticipate.
- Social Security. Relying solely on Social Security is problematic for many reasons. First consider that the average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012 (source: Social Security website FAQs, Jan. 2013). Then realize that the age required to receive a full retirement benefit is increasing. And further recall there were no cost-of-living adjustments in either 2010 or 2011. Coming changes seem certain to affect this program…and your clients’ financial security.
- Extended risk exposure. For many clients, retirement periods now will stretch longer than they did for the generations before them. Living longer brings with it decades of post-employment exposure to such wealth-eroding forces as taxes, market volatility, inflation and more. The longer the exposure to these risks, the more preparation is required to address them.
All these forces and more – forces that clients may have had little need to consider during the accumulation phase of their retirement preparation – can sap retiree resources. And they can increase the chance that a client’s retirement income may end before their retirement does.
That’s why, even if your client is well past the accumulation stage and no longer saving for retirement, it’s just as important they continue working with you through the distribution stage of retirement. As a financial professional, it’s up to you to help clients:
- Understand the new risks they could face in their new phase of retirement.
- Consider their current fixed and variable sources of retirement income and how they can best be utilized for future needs.
- Identify suitable financial products that can enhance their personal retirement income distribution plan.
Switching from accumulation to distribution
Of course, reaching retirement should be a happy time. Not only is your client starting a new phase in life filled with promise for enjoyable events, hobbies and travel, they are also switching from saving assets for retirement to employing them for their benefit.
Think back for a moment. Remember when you began your first job. How nervous were you? And if you remember your first day of work being scary, imagine what the first day of retirement may be like for your clients. Long ago, the prospect of saving enough for retirement may have seemed daunting. Now the challenge is to formulate and execute a plan to manage the distribution of assets over a retirement of uncertain length and risks.
Help your client make that plan a reality. Use your expertise and experience to help turn “Now what?” into “Now I’m ready!”
For more from Mark E. Caner, see: