What You Need to Know
- Advising on which accounts to tap and when is a complex task in which financial advisors have an advantage over robo-advisors.
- The 4% withdrawal rule is a good starting conversation to educate clients on decumulation.
- Advisors, particularly young ones, should focus less on lifestyle advice for retirees and more on the mathematical problems of asset withdrawal, Milevsky says.
Moshe Milevsky is on fire when discussing his most recent project: explaining what decumulation really means and outlining how it applies to clients, advisors and the financial services industry in general. Here’s a hint: It’s not retirement planning, but something more complicated. Therefore, it should be more expensive to clients.
Milevsky is a tenured professor at the York University Schulich School of Business in Toronto and a managing director of PI Longevity Extension Corp., a fintech company that develops algorithms, intellectual property and economic strategies to extend the longevity of portfolios. For 30 years, he has been training students and advisors alike on new ideas, new directions and new products in the retirement, and decumulation, arena.
Retirement Planning vs. Decumulation
Drawing down wealth and retiring from the workforce are two different events that take place simultaneously, Milevsky explains.
Economists have finally realized two things: People don’t necessarily retire all at once, and many people “don’t hate work as much as economists might think, because some of us derive social engagement from it,” he told ThinkAdvisor. “We like seeing people outside our family, as COVID has taught us, and we actually like what we do.”
In short, decision-making on how and when to retire is a “a sociological/psychological problem” that is more complicated than it might seem. A financial advisor, particularly a young one, trying to counsel a retiree on lifestyle issues may come off as “vacuous,” Milevsky says.
Instead, he says, advisors need to “stick to their knitting” and “draw a line around what they have expertise in and get better at that, and vice versa. [They should] partner with professionals in related fields to deal with these other fields.”
Decumulation, for its part, is a mathematical problem — a process far more complex than the process of saving and investing for retirement, he says — it’s “the process of figuring out how much to take out of my accounts every year and which accounts I should take them from in the most tax-efficient manner.”
This has several facets: Should the money be pulled from Roth IRAs or taxable accounts? When should a client claim Social Security or take their pension early? Should a 401(k) be rolled into an IRA or be kept in the plan? What about annuities?
4% Rule Is a Good Start
For decumulation, advisors need “a powerful, robust dashboard to help them with this complex problem; it’s no different than building portfolios,” Milevsky explains.
In the old days, he says, brokers would recommend stocks. Then they realized they couldn’t build portfolios one stock at a time so began to study asset classes, correlation structures and historical returns as they moved to asset allocation.