Retirement planning is one of the key services advisors provide, but it can be difficult. There is no one-size-fits-all model because the circumstances and needs of individuals and couples differ widely and unlike asset management, retirement plans must take into account both sides of the ledger — assets and liabilities.
Moreover, says Michael Kitces, head of planning strategies at Buckingham Wealth Partners, current industry tools for retirement planning “are not very good.”
For example, they don’t provide an adequate framework to adjust from from two people in a couple to one, based on different longevity rates, said Kitces, who participated in a panel in the Engage 2020 virtual conference sponsored by the American institute of CPAs (AICPA) and Chartered Institute of Management Accountants (CIMA).
“There is a distinction between joint life expectancy for both and joint survivor life expectancy for one,” Kitces said.
He would ideally like to show clients a reconfiguration of a retirement plan where one person in a couple lives longer, say into their 90s, than the other person but “that’s hard to do in [current] software.”
Kitces uses a baseline of 95 for joint life expectancy for his clients but makes adjustments based on client preferences and their health history and/or that of their parents.
That’s unusual, according to David Blanchett, head of retirement research for Morningstar’s Investment Management group, who was also on the panel. “Seventy percent of advisors use age 90 as the age of death for clients regardless of their expected retirement age … [and] 90 is way too conservative.”
The age at retirement is another item that many advisors get wrong, according to Blanchett. On average, people retire about three years earlier than planned, so they need to save more now, rather than less, Blanchett said.
A clearer view of what retirees need in retirement, however, could be accomplished if their expected Social Security payments, along with any pension payments, were included in their retirement plan, according to Blanchett. There is a “need to to quantify the value of [those] nonfinancial assets,” said Blanchett. “No one goes broke in retirement because they always have Social Security,” but retirement plans only view “assets as income, not income as assets.”
Another asset retirees can tap is the equity in their home, Kitces said, explaining that retirees can sell and downsize or enter into a reverse mortgage to access that asset.
Retirees also have the ability to adjust their spending in retirement if they’re concerned about shortfalls. Plans should incorporate flexibility within Monte Carlo analysis of their portfolios to test whether they’ll have enough income throughout their retirement, said Michael Finke, professor of wealth management at The American College of Financial Services.
Retirees also need to understand how much of their budget is fixed and how much is variable, which provides an idea about how flexible they can be, Finke said. Retirees concerned about running out of money in retirement could buy a guaranteed income contract, including a qualified longevity annuity contract, to provide income starting at age 85 and “take away a lot of the risk.”
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