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Retirement Planning > Retirement Investing

Retirement: Moving from model to plan

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A benefit of the growing interest in retirement income planning is the growth in sustainable distribution research.

Instead of relying on anecdotal experiences, advisors can review different studies, judge their methods and results, and then determine if and how the findings should influence their work with clients.

Securities America’s study, Capturing the Income Distribution Opportunity, was first published in 2011 but the updates are still worth reading. Using relatively straightforward assumptions, the white paper back-tested three income strategies:

  • systematic withdrawals,

  • variable annuities with guaranteed minimum withdrawal benefits,

  • and a time-segmented allocation model, also known as the bucket approach.

The study found that the time-segmented approach produced the highest sustainable withdrawals, but the statistics are just one facet of the findings, according to Zach Parker, the firm’s first vice president of wealth management and product strategy.

“Even though you have a strategy that provides the highest withdrawal rate, you still have to focus on the client as an individual and their emotional capabilities to take on risk,” he says. “And, so, those clients that were more emotional in nature and had certain needs and certain requirements from that perspective probably should consider some form of guaranteed income within their plan.”

That realization helped shaped the NextPhase(™) Plan, the firm’s current retirement income planning process. It’s essentially a time-segmented model that includes six segments with an optional guaranteed lifetime income segment over a 25-year time horizon. Securities America has designed a fact-finding and planning process around NextPhase that encompasses four factors.

The first factor is guaranteed income, which comes right from the white paper, Parker explains. The firm believes that clients have a need for guaranteed income in certain situations so the advisors ask specific questions relating to this potential need.

If the client needs scores high, the advisor will use recommend more guaranteed income solutions in the plan, which in turn will decrease the remaining assets’ withdrawal rate.

”The more guaranteed income you use in the plan, the less income you’ll be able to take off the same investment amount,” he notes. “If they score really low on that, then they might not need guaranteed income at all and you use the bucket approach that we have established for those individuals that don’t need that guaranteed income piece. Most clients end up somewhere in the middle so they might use 25 or 30 or 40 percent guaranteed income and the rest in the bucket strategy.”

Risk tolerance, which the firm refers to as the volatility factor, is the second consideration. The goal is to build a plan that balances the need for income with the clients’ comfort level. Cash needs are the third factor.

Advisors uncover this need through a series of questions designed to estimate the probability of the client coming back to the advisor in the next three to five years saying that they need more money, says Parker. Unexpected expenses are a typical source of need, but clients may want to set funds aside (from their income-generating assets) to help family members, as well.

The fourth factor is the clients’ desire to leave a legacy. Planning around this goal involves determining how much income the clients are willing to forgo to fund their legacy. Parker describes the questions an advisor would ask: “If it came down to your income goal, say, hitting that $5,000 a month as a goal, or leaving this desired legacy, which would you prefer? Would you prefer to leave the desired legacy and take $4,500 a month or do you want to take the $5,000 a month and maybe leave a lower legacy?”

NextPhase is product agnostic, says Parker — the goal isn’t to steer advisors toward any particular product. “We’re trying to help (advisors) look at it situationally and create balance around product selection versus somebody just saying I like this product, I’m going to sell it or I don’t like this product and I’m not going to sell it,” he says.


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