The need for comprehensive retirement income planning services increases every day, as more and more people near retirement without the security of a defined benefit pension plan. Because pensions are becoming a thing of the past, and Social Security usually represents only a fraction of the income needed by modern retirees, a huge potential income gap exists that must be planned for in a very responsible way.
Academic researchers are hard at work building, testing, and refining various income planning strategies for those of us who are on the front lines. With the body of academic research growing at an ever-accelerating pace, the challenge to us advisors is in figuring out how to join the party without being “run-over” by the complexity of income research. There is a lot at stake, but where does one even start?
Below, I would like to offer you the three Retirement Income Strategies that I believe every forward thinking advisor must learn. While this is only a short list, it is the perfect place to start. Knowing the principles behind each of these three distinct approaches will allow you to get your mind right so that you can make an informed decision on what is right for your clients, and also more easily navigate the advanced, and more nuanced strategies.
I believe that the following three strategies are the foundation that everyone must learn before digging deeper into any of the others. If you are planning to stay on top of your clients’ needs and meet the huge potential income gap, I highly recommend an in-depth study into the further nuances, benefits and drawbacks of each.
1. Systematic Withdrawals – Often described as the 4 percent safe withdrawal rate strategy, this income planning strategy involves taking withdrawals from a risk-based investment portfolio that is rebalanced regularly. The main concept here is to monitor the clients’ spending each year and make adjustments to withdrawals to match investment returns, so as to avoid running out of money during the client’s lifetime. Because this strategy requires regular, ongoing maintenance and is dependent on market returns, it falls into the category of a “probability-based” income strategy. Because it is probability-based, it also much debated for its dependability in low interest rate and high market volatility environments.