Financial advisor helping a senior couple at home

Nobel Prize winner William Sharpe puts it best: the risk of running out of money in retirement is the “nastiest, hardest problem” to solve in finance.

Indeed, advisors spend significant time plotting retirement saving strategies, however, developing sustainable income strategies for the distribution of savings is just as critical.

According to Dan Moisand, CFP and principal at financial planning and wealth management firm Moisand Fitzgerald Tamayo, advisors are devoting more time on retirement income strategies than ever before, which he says began when baby boomers started retiring en masse, amplifying the number of people facing retirement challenges.

“Advisors have two hurdles to overcome,” says Moisand. First is the technical aspect of how to generate cash flow in retirement while sifting through all the options. “Advisors face lots of assumptions, variables and moving parts.”

Secondly, there’s a psychological element where retirees who have saved their whole lives are now faced with spending their savings, a difficult transition for many.

“It’s a hard switch, because they are adjusting to not working and seeing the value of their ‘nest egg’ change more in a month than they spent on their first house.”

Jamie Hopkins, CFP agrees. “It’s a rude awakening for individuals to start spending down their assets and making withdrawals.”

Hopkins, who is Director of Retirement Research at Carson Group, has written extensively on retirement strategies and is a finance professor of practice at Creighton University’s Heider College of Business.

“Income planning is getting more traction as we move away from pension plans and the onus of generating retirement income has shifted to the retiree,” adds Hopkins. Advisors are evolving their retirement income approach as well.

Some advisors have rudimentary income planning strategies in place, observes Hopkins, but in reality, very few advisors are well trained in income strategies. He sees it changing as more advisors use a combination of three retirement income strategies.

Systematic withdrawal tends to be the most popular and revolves around an investment portfolio consisting of bonds, CDs, stocks, mutual funds, etc., which are sold off each year to generate income. Its total returns approach seeks greater long-term returns and rebalances investments over time in order to generate a steady, inflation-adjusted cash flow for the retiree from a volatile investment portfolio.

A flooring strategy creates a base of income with a variety of products and strategies. Social Security and pensions provide the floor, and then annuities, bonds or TIPS ladder are layered on to generate a secure income over time.

Time segmentation or bucket approach groups investments into different categories to provide near-term (cash, bonds, CDs, term annuities), mid-range (bonds, mutual funds, CDs, and long term income (stocks).

Looking ahead, Moisand says advisors will need to better understand Medicare, elder care and assisted living to help “marshall resources to help clients navigate that morass.” He also predicts the retirement annuity market will become more competitive, which will help drive down pricing.

“The shift from accumulation to decumulation means advisors better get up to speed, fast.”

Hopkins predicts the niche advisor market that focuses on retirement income will further develop. Additionally, there will be an evolution of tax efficiency planning software and an increase in behavioral finance as part of retirement planning.

Bottom line, says Hopkins, retirement income plans need to be flexible enough to withstand changes, such as market volatility, tax cuts, legislative changes, like the SECURE Act, and more.

And so will advisors.