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Retirement Planning > Retirement Investing

Retirement income planning: The next frontier

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Retirement income planning is gaining traction with the public and among advisors as a practice specialty. In November 2013, USA Today ran an interview with the director of The American College’s Retirement Income Certified Professional (RICP®) designation, which launched in 2013. It’s been a good first year for the RICP: over 3,000 participants, including this writer, had enrolled in the program by late 2103. Advisors can choose from other professional educational programs aimed at retirement income planning as well. The International Foundation for Retirement Education offers the Certified Retirement Counselor® designation and the Retirement Income Industry Association has developed the Retirement Management Analyst(SM) program.

Given the proliferation of certificates and designations available in the financial advisory business, it’s fair to ask if the world needs more sets of initials to list on business cards. Critics can argue that income planning is just another phase in retirement planning and doesn’t merit specialized study. Advisors already help clients accumulate assets for retirement, so what’s the big deal about shifting from accumulation to distribution?

Proponents of retirement income planning as a separate discipline believe it is a distinct process. For starters, consider the duration of each phase. Retirement planning focuses on accumulating assets by a target date. Although the date is subject to some unpredictability, the client decides when to retire. In contrast, retirement income planning deals with an unknown lifespan. Advisors can include life expectancy statistics and personal factors like the client’s health and family history in their projections, but it’s still a question of providing adequate funds for an unknown period.

What is retirement income planning?

There is no single definition of retirement planning but industry sources largely agree on the main elements. Dave Littell, JD, ChFC®, CFP®, is director of the New York Life Center for Retirement Income at The American College in Bryn Mawr, Pa and co-developer of the RICP program. He describes retirement income planning as focusing on an individual’s income needs and their other financial goals in retirement, such as contingency funds, risk management and legacy planning.

Jeff Cimini, head of personal retirement for Bank of America Merrill Lynch in Boston, emphasizes that retirement income planning is a process, not a product. It’s not about achieving a single number, he says, because the process incorporates “all of the things that our clients are faced with when determining how to live their retirement years.” Those issues can include the timing of Social Security benefits, funding health-care expenses and determining how to generate additional income. “It’s a holistic planning process that tries to really understand what our clients are hoping to do in their retirement years and then working with them to make sure that from a financial perspective they achieve what they’re hoping for in their retirement,” he says.

Differences from accumulation planning

Cimini notes that two of the main factors clients and advisors must consider with pre-retirement financial goals is the amount to be saved and how those savings should be managed—the asset allocation decision. The scope of required decisions expands for retirement income planning, however, and the challenge is compounded because of uncertain life expectancies. “When you get to retirement, not only do you have to replace the income that your employer was paying you but you tend to have to make substantive decisions about how you’re going to handle health care, and how you’re going to handle your income. Generally speaking, you have an unknown date that you’re managing that toward,” he says. “That uncertainty has some pretty significant impacts in terms of how you approach the planning process.”

Littell cites additional risks that retirees face that they may not have encountered or considered while working. These include inflation, health-care and long-term-care coverage, frailty and incompetence. Financial risks also change after retirement and sequence-of-returns risk is one of the most critical.

Much of the retirement income planning research has focused on sustainable portfolio withdrawal rates. The goal is to estimate the percentage of a portfolio’s value can clients withdraw annually without depleting their funds too quickly. Research has shown that once clients start taking withdrawals, the portfolio’s returns during retirement’s early years have a major impact on its sustainability. This is the period when retirees are most exposed to sequence-of-returns risk, Littell explains. “If the market is bad for the first few years of retirement, you’re going to run out of money much quicker unless you have some system or some plan for addressing that,” he says. “So, one of the big differences between accumulation and decumulation is that particular risk.”

Even the standard definitions of risk and return need modification for retirement income planning, Littell maintains. The traditional measures of risk use volatility measures such as standard deviation while total return gauges the portfolio’s income yield and capital appreciation or loss. Those definitions don’t work as well for retirement income, he says. “In retirement income planning, the risk is that you’re going to run out of money before the end of your life and the return is the amount that you get to withdraw,” he says. “If I withdraw 10 percent (from the portfolio), I have a higher return in my decumulation phase but I have now increased my risk that I’ll run out of money before the end of life.”

What it could mean to your practice

Numerous statistics support the idea of a growing demand for retirement income advisory services. Once frequently cited figure is that an estimated 7,000 Americans will reach age 65 every day for the next 17 years; research shows that many of those consumers need advisors. A recent study of defined contribution plan participants published by Chicago-based market research firm Spectrem Group highlights the potential market among pre-retirees. According to the report:

  • Fifty percent of plan participants in the critical age group of 50-64 currently do not have an advisor, despite the fact they are approaching retirement age.
    Over 40 percent of plan participants will be seeking advice in the future on planning for long-term care, implementing tax strategies and establishing an estate plan.

The boomer demographic shift is already influencing investors’ expectations around retirement income planning, says Cimini, because many members of this cohort lack the safety net of employer-sponsored pensions. As a result, Merrill Lynch’s advisors have had to adapt because those clients are asking for help with generating their own retirement income. Clients’ retirement concerns go beyond income, though, Cimini adds: “How do I take Medicare? What is Part A? What is Part B? How does Part D work in? What is Medigap? What’s the donut hole? All of these types of things tend to influence how you put together a program to help clients make sure that they get the retirement that they expect when they enter that phase of their life.”

Dee Costa is president of Asset Marketing Systems (AMS), a field marketing organization in San Diego. Although Costa no longer works in production, she’s enrolled in the RICP program. She plans to use that background in designing and field-testing a new program that AMS will call Retirement Income Planning for Women, and she encourages AMS staff and affiliated advisors to seek out retirement income planning training.

Costa believes helping people understand how to navigate through retirement is a completely different skill set than accumulation. “Accumulating money is actually pretty simple,” she says. “Teaching people how to maximize their Social Security, how to minimize their taxes, how to make their money last a lifetime, when to retire, to understand the risks they’re facing in terms of long-term care or catastrophic health issues, that’s a big deal. And, you know, as advisors, I feel almost as though we have a moral obligation to move it to the next level.”

Emerging product solutions

As Cimini points out, the demise of traditional defined benefit (DB) pensions provides another business reason to focus on retirement income planning. Towers Watson reports that only 30 percent of Fortune 100 employers now offer DB plans to new hires; the remaining 70 percent are providing only defined contribution (DC) plans.

The discontinuation of DB plans has led to a disconnect with employees’ needs. The “2012 Prudential Retirement Plan Participant Survey” found that three out of four DC-plan participants felt it was important that their workplace retirement plan include a guaranteed income feature. In other words, employees are still want a lifetime income option—i.e., a pension replacement—to ensure they don’t outlive their assets.

Financial services firms recognize the market opportunity this desire creates and have started offering in-plan retirement income solutions. Some solutions provide systematic withdrawals through professionally managed accounts; others use immediate annuities; another approach offers guaranteed minimum withdrawal benefits (GWMB) to combine systematic withdrawals with an annuity. Prudential Retirement’s IncomeFlex Target® product is an example of an in-plan, guaranteed retirement-income solution that utilizes GMWB. IncomeFlex was designed specifically to help employees transition from the accumulation phase to the income phase by converting their account balance into a lifetime income stream, according to Harry Delassio, senior vice president, strategic relationships with Prudential Retirement in Hartford, Conn. Great-West and Transamerica also offer in-plan GMWB products.

DC plan sponsors, meanwhile, have been slow to adopt in-plan retirement income solutions. A 2013 survey by Aon Hewitt of more than 400 employers covering over 11 million employees found that only 12 percent of employers offered in-plan managed payouts; 10 percent offered annuities. Given employees’ interest in replicating DB-style benefits, however, those low adoption rates are likely to increase. That means you’re more likely to encounter prospects or clients with access to these solutions who will need your advice. 

The Stanford Center on Longevity (SCL) and the Society of Actuaries have published a white paper, “The Next Evolution in Defined Contribution Retirement Plan Design,” which is available online at It’s an excellent review of the in-plan options you’re most likely to encounter with clients in the next few years.

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