The 3 retirement income strategies every advisor must learn

2. Flooring / Essential versus Discretionary – Sometimes called “expense-matching,” this income strategy pairs a floor of lifetime income, generated by either a bond ladder or an annuity income stream with the essential expenses projected for the retired client. Discretionary expenses (big trips, “wants”, and inflation protection) are met with assets invested in a risk-based investment portfolio, apart from the income floor. Because discretionary expenses are by definition, non-essential for daily existence, the risk of market losses does not pose a disastrous threat to the retiree’s financial security. This income strategy falls into what you might call the “safety first” category.

3. Bucketing / Age-Banded – This income strategy involves the use of time buckets of money. For example, a 3-bucket strategy might have the client place enough money for the first 5 years of retirement income into bucket 1, the second 5 years into bucket two, and years 11 and beyond in bucket 3. Each bucket might contain assets of increasing levels of risk and possible return, aligning nicely with the client’s investing time horizon. Depending on the client’s risk-tolerance or risk-capacity (two different things), the buckets may be filled with conservative-to-aggressive risk-based investments or even short-duration (5-year payout) annuities in buckets 1 and 2, with GLWB or GLIB annuities, or a QLAC or SPIA in bucket 3. Any remaining assets would be placed in a risk-based investment account outside the income plan, to be used for discretionary expenses or inflation protection.

While each of these 3 income strategies has its own advantages and disadvantages, all are viable income plans when used in alignment with the client’s objectives.  My objective here is not to give you all of the nuances that can lead you to favor certain approaches, but to prepare you to research on your own. The body of knowledge continues to grow quickly in the area of retirement income planning, and without hours and hours of reading and studying; you will be left behind, leaving your clients at risk.

There has never been a better time to differentiate your practice from others by deepening your expertise and experience through sophisticated income planning. Use these three strategies to navigate your personal research, and when you do, be prepared to be blown-away by just how deep this rabbit hole goes.

p.s. Keep an eye out because my next three articles will offer a further explanation, from my vantage point, of the pros and cons of each of these three key strategies.