What could be easier than retirement planning? You get a high-net-worth, well-compensated client who will retire in, say, 20 years. You get the particulars on the client’s overall goals and family situation, encourage said client to save as much as possible—max out that 401(k)!—and place existing assets in a retirement-optimized portfolio holding plenty of stocks to take advantage of the equity risk premium. You make sure their pension plan isn’t all in their employer’s stock, tell them to wait until their full retirement age to maximize their Social Security benefits, plan a 4% withdrawal rate and hey, presto! Your silver-haired, healthy client couple takes walks on the beach, winters in Costa Rica and entertains grandchildren at that summer place on the Jersey Shore. Finally, that vigorous, smiling couple gets run over by a taxicab at age 90 on their annual Parisian vacation and go to their just rewards (that’s my wife’s vision of a happy death). What could be easier, right?
Wrong, of course. Your clients may want to retire in two years, not 20. Equities alone are unlikely to return what they have historically while safe bonds are returning, well, zero. Most folks don’t have traditional DB plans, and maximizing Social Security benefits is tricky at best (assuming full benefits are even still there in 20 years). Academics and practitioners alike are questioning the wisdom of that 4% rule. It’s also far more likely that your retired clients will experience serious, expensive illness and the death of a spouse (especially if you’re a woman; see Olivia Mellan’s feature story on page 40) than that they will be enjoying strolls on the Champs-Élysées as a vigorous nonagenarian couple.
Our cover story this month presents five different challenges that the editors chose as paramount for advisors planning clients’ retirement in 2014. We could have chosen 15 challenges, but the message is the same regardless of the discrete issue: It’s tough to plan for retirement. It’s not getting any easier. The traditional pathways to ensuring clients don’t run out of money in their old age are rocky. They’re likely to spend more in retirement, especially for health care. Vehicles like target-date funds, the most popular 401(k) default investment, didn’t exactly perform as advertised during the financial crisis. That silver-haired couple is more likely to have an unexpected passenger (or passengers) coming along for the ride: their children.
Of course there are calculators and smart investing vehicles and rebalancing tools you can use to improve your clients’ chance of success, but you can’t predict how the markets will perform, which insurers will become insolvent or what your leaders on the federal level will do to “solve” the retirement planning challenge. There are some smart academics working on real-life solutions, such as Michael Finke and Moshe Milevsky and Wade Pfau. Practitioners like Harold Evensky point out that what clients in retirement can control are their expenses. Anecdotally from his own client base, he says they are spending more in retirement due to higher life expectancies and better overall health.
Retirement planning is not a “set it and forget it” task. It takes long-term planning mixed with shorter-term adjustments as society and health care and the markets and federal laws and regulations change. It cries out for getting involved politically. It would also benefit from more research that advisor practitioners can use.