I recently read another story in the trade press about an advisor approaching income for clients in retirement with an investments-only strategy. In my decades working with advisors, this approach is all too common.
And, for the retiree, cash flow versus income is a distinction without a difference.
While the article acknowledged investors’ increased fear of outliving their money, the advisor’s recommended solution was to increase risk within their portfolio rather than proposing an allocation to an annuity, a product purposely designed to deliver secure retirement income and address longevity risk.
Unfortunately, this line of thinking is not unusual. Over the past 40 years, to combat lower interest rates and expanding longevity, advisors have resorted to strategies that involve more risk in retirees’ portfolios. The formerly standard practice of derisking an equity-heavy accumulation portfolio to a fixed income-heavy retirement portfolio as retirement nears rarely happens anymore. A stocks-fixed income allocation of 60-40 (or even more heavily weighted to stocks) is now a retirement portfolio standard.
Historically, the 60-40 portfolio would yield 6% to 7%, a return that could fund a 4% safe withdrawal rate for 30 years of retirement. However, as many advisors plan for life expectancies to age 100 and sometimes beyond, there is a need to either lower the safe withdrawal rate, which is not popular with clients, or attempt to increase yields from the portfolio, which means taking more risk.
For example, in the article, the advisor suggested that a 6% to 6.5% withdrawal rate could be achieved for 35 years. This would require a portfolio return of close to 10%, an outcome either completely unrealistic or reliant on taking significant risks with a client’s retirement nest egg — and still with low odds of achieving the required return.
The other aspect to these strategies that I find troubling is the advisor’s presumption that clients will have the fortitude to withstand market volatility that can create unpredictability in their retirement income, while also being able to “just spend less” in retirement if there is an income shortfall.
Advisors tend to present these strategies as the only way to fund retirement income, rather than introducing an investments-only approach as one option of many. The best advisors present multiple options for funding retirement, including strategies that use annuities, and do so without bias.
They let their clients decide what feels most appropriate for them rather than limiting clients to a strategy that feels most comfortable for the advisor.
I’ve heard advisors brag about how they’ve never had clients run out of money in retirement. Yet, managing a person’s money from age 50 to 100 is longer than most advisors’ careers. These approaches and attitudes are far too cavalier given the importance of retirement.
Annuities are products designed to solve for the very need that retirement investors who worry about outliving their money have — a reliable, predictable stream of income that will last as long as they do. For decades, academics and economists have understood, discussed and published research demonstrating how annuities can deliver secure, lifetime income. A retirement portfolio with an annuity is very difficult to outperform using a total return strategy for income. The value of an annuity as an income solution, then, should be considered by financial professionals advising clients on ways to fund their retirements.
In practice, we’ve found this to be true. In surveys, advisors who have used annuities report that their clients tend to worry less about market fluctuations and stay the course with their financial plan in times of volatility.
I’m not suggesting that annuities are right for everyone. But advisors who don’t educate themselves on the products and present them as an option, especially for clients who are in danger of and/or fear outliving their money in retirement, are not taking their fiduciary responsibilities seriously enough.
The loss of a paycheck and the feeling of security it provides is very often scary. Advisors can help address clients’ concerns by presenting options for guaranteed income solutions along with other strategies as appropriate. By recommending more risk as the only solution, advisors are magnifying rather than mitigating clients’ fears.
David Lau is the founder and CEO of DPL Financial Partners, a financial services firm specializing in the development and distribution of commission-free insurance and annuity products.
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