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The 3 retirement income strategies every advisor must learn

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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.

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. 

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