It's Time to Get Real About Retirement
Retirement has changed significantly over the past 20-30 years. Old school retirement planning was easy compared to today’s standards. I am probably oversimplifying, but many people worked for a company for thirty years and then received a pension for the rest of their life. Retirement planning back then centered around making monthly expenses less than monthly pension and social security income. Flash forward to today, and the level of complexity for someone to retire has increased tenfold. Modern-day retirees are faced with more variables, of which most they do not control. What is potentially troubling is the advice model for these people is sometimes filled with bias as well as inexperience when it comes to providing advice for living off your money for an extended period like retirement. The hope is today’s financial advice world can create a process that works for modern-day retirees. Here are some ideas to consider.
It’s all about income
It does not matter where you are in life. You can be just starting out or already retired. If you have enough income or cash flow coming then, your financial stress is low to nonexistent. That’s why we believe it is all about income and why the pension model of retirement was so perfect. With the old retirement model, a retiree knew exactly how much was coming in, so they only needed to plan one thing - their expenses. The new model of retirement has forced us to grow an asset base and figure out how to make it last for a retirement lifetime. With this change, we shouldn’t lose sight that it is still all about income. Our planning and mindset should be focused on creating sustainable income and retiring when we have enough income to achieve our desired lifestyle.
Retirement scores are a tool not a plan
With the shift from pensions to the 401(k) came the emergence of retirement planning software. The more popular programs summarize the “healthiness” of one’s retirement into a score or color. While we agree they are great tools to analyze someone’s retirement, they are far from a perfect plan. Data input today can suggest someone is going to be “safe” in retirement. But, if (or when) any of those inputs don’t happen perfectly, then the score changes. Sometimes they can change enough where you are no longer “safe.” Then the tough conversation comes about having to spend less and reduce lifestyle goals.
Another thing to consider is the perception of safety can be different from person to person. I remember a conversation between an advisor and his retired engineer client. The advisor enthusiastically told the client he had an 85% success rate, and the client looked at him and said, “So you are telling me I have a 15% failure rate. If I built a plane like that in my working years, they wouldn’t let it off the ground.”
The reality is many advisors have not had clients living off their money for 20 or 30 years. Nor have these software programs been around that long either. So, they have not fully experienced the complete “retirement lifecycle” of someone living off their money and using these tools. I am not knocking these programs. They are excellent analytical tools, but our belief is a prudent plan will use tools like these in conjunction with what we learned from prior generations on retirement income planning.
What is in the client’s best interest?
What we learned from prior generations is income certainty worked. Pensions provided predictability of income, which simplified the client’s planning to manage their spending. A simple modern-day approach to retirement that incorporates the old and the new is to:
- Have a client itemize their income into essential and discretionary categories.
- Match essential income needs with guaranteed income sources like pensions, social security, and annuities.
- Fund discretionary income needs with things like rental income or systematic withdrawals on investment accounts.
While we understand this might not be the sexiest of approaches, we do know it can be effective, and it can provide income stability to a retirement. Our belief is if it executes on the said objective of a successful retirement, then it is in the client’s best interest.
Why don’t more advisors adopt this approach?
This approach is simple and effective, so why don’t more advisors adopt this approach? When we present this concept to advisors, we hear statements like, “it makes sense, but I don’t like annuities.” I am bewildered by this statement. Retirement is about creating enough income. If a client has a pension, then they don’t need an annuity. If they do not have a pension, then an annuity is the only investment “pension-like” in the marketplace. It is that simple. Other objections against annuities are costs, surrender charges, commissions, and annuitization (aka giving up your principal in exchange for income.) The good news is annuities have evolved so you can get them in commissionable or fee-only products, with shorter surrender schedules, and you can solve for income by annuitizing or through income guarantees that don’t require annuitization. Some annuities can even network into your portfolio reporting software. I guess what I am saying is maybe it is time to get real about retirement, and that starts with the advisors rethinking their retirement planning approach.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.