In recent years, an increasing number of practice management consultants have begun to sound the alarm on the dangers of having an aging, retiree-centric client base in a financial planning firm. As the logic goes, retired clients are depleting their portfolios with ongoing withdrawals, and more and more will pass away as the years go by, so a planning firm with aging clients is akin to a rapidly depreciating asset.
However, a deeper look at the numbers reveals that these drawdowns in client assets may be overstated, at least in the coming decade. After all, the reality is that at a 4% safe withdrawal rate, a balanced portfolio should still be able to grow for years to come, and there’s actually a 96% chance that clients will still have all of their nominal principal left even after 30 years. Similarly, while the mortality rate is higher as clients age, the reality is that out of 100 client couples aged 65, the statistics suggest that 90% of them will still be around in 15 years.
Of course, the caveat to working with retirees is that, compared to accumulator clients, the mere fact that they’re spending and not saving with ongoing contributions is still a headwind, and obviously even the modest attrition rate for early retirees is still higher than what it would be for younger clients.
Nonetheless, these statistics suggest that firms simply worried about retaining value in the coming years should perhaps focus less on catering to the next generation to reduce the average age of clients (especially if those clients can’t be served profitably by the firm in the first place), and more on retaining the current generation, especially by building relationships with both members of a couple to increase the likelihood of retaining a surviving widow.
While the demographics of an aging client base will eventually be more of a challenge, the real impact is still many, many years away, and simply focusing on retaining widows (or not) of the current generation may matter most of all in the coming years!
How Much Do Clients Really WIthdraw in Retirement?
For an advisory firm that’s built around the assets-under-management business model, it’s proper to be concerned about having clients who are retired and taking withdrawals from their asset base since that constitutes a headwind to growth and sustainability. Yet the reality is that relative to the asset base itself—and the prospective growth of markets—ongoing retirement withdrawals are not likely to deplete assets significantly. In fact, the withdrawals may not deplete assets at all for years to come.
The reason that retirement withdrawals are not all that destructive is the simple fact that in the early stages of retirement, withdrawals relative to total assets tend to be rather modest. For instance, the chart below shows how rising spending (yellow line) impacts a retirement account balance (red line) over time, assuming an 8% growth rate on a balanced portfolio, and an initial withdrawal rate of 6.6% that rises each subsequent year for inflation (i.e., $66,000 withdrawal in year one on a $1 million portfolio, and the $66,000 withdrawal amount is increased in each subsequent year for inflation).