Part 3 - PROVIDE Retirement Income

Retirement income planning is more complex than accumulation planning.

To estimate how long a nest egg might last, first identify the client’s expenses and available resources during retirement. Retirement accumulation rules of thumb, such as targeting 70-85% of pre-retirement income, are based on averages and therefore should be replaced with identifying a client’s actual spending needs and building a plan to meet those expenses, or determining how much they can afford to spend once resources are repositioned for retirement income.  When helping the middle mass and middle affluent consumers plan for retirement income, a more defensive strategy is needed than just the structured, 4% systematic withdrawal approach commonly used by financial advisors today.

That’s why Part 3 of planning for retirement income is to produce retirement income that will last.

One of the most effective approaches for securing retirement income for the middle market is to ensure that essential expenses (such as food, clothing, and housing) are covered by income from lifetime sources such as Social Security, pensions and immediate annuities. Discretionary spending needs or wants (such as travel and entertainment) can be matched to income from managed sources, such as taxable accounts, personal retirement accounts, employment income (human capital), or other managed sources.

We help advisors choose appropriate retirement income approaches by providing CE courses from today’s experts.

We are a CE Quality Partner of the CFP Board of Standards and have over 50 courses accepted for continuing education (CE) credit for those who have earned the Certified Financial Planner® (CFP®) certification, the College for Financial Planning’s Chartered Retirement Plan Consultant (CRPC) certification, the American College’s designations (ChFC, CLU, RICP), the International Foundation for Retirement Education’s (InFRE) Certified Retirement Counselor® (CRC®) certification, ASPPA and other certification or designations.

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Planning for retirement income includes targeting both an asset allocation and income allocation.

Asset allocation is the backbone of retirement accumulation and income planning.

Income allocation, or how you create sustainable spending power from retirement assets, is a critical part of the process to make sure that a retiree does not outlive his or her assets.  Income allocation provides a foundation for managing retirement-specific risks by identifying the gaps in lifetime and managed income sources that can be used to cover essential and discretionary expenses, and also help extend the number of years their money might last.

Any income gaps will become apparent using an income allocation approach. Most clients will need help prioritizing their options to close their gaps, and its most likely that a combination approach will be necessary.  It is important to discuss what’s on and off the table for closing retirement gaps.  If clients are relatively healthy, it makes sense for them to delay retirement so they can better preserve their assets, maintain their desired lifestyle, and retire with more confidence.

Working a few more years can also improve retirement security by:

  • boosting monthly Social Security benefits for their lifetime;
  • setting aside additional savings that can grow for 20 years and fund the final years of retirement, and
  • reducing the number of years needed to rely on retirement assets.

Approaches to producing retirement income

There are also a variety of approaches to constructing an income portfolio to meet a client’s specific needs.

  • 4-5% systematic withdrawal plan (SWP), with 50%+ allocation to equities
  • Combination of equities and annuities
  • A stages model for planning income distribution
  • Laddered annuities or long-term Treasuries
  • A combination of TIPS and longevity insurance
  • Time-segmented distributions (such as CDs or money market accounts for the first five-year segment, fixed annuities for the second segment, and the last four segments could be variable annuities, managed accounts, etc. for dollars that will not be used for 10 or more years)
  • Asset allocation improvement and distribution glide paths (decreasing equity allocation throughout the retirement income period)
  • Dynamically managed withdrawal rates

The commonly-used SWP-only plan from a managed account places the entire assumption of income risk on the client.  An effective compromise is to fill a discretionary income gap (Gap B) with a 4-5% SWP from managed assets and combine it with annuitization of a portion of the managed assets (for example, 25%) to fill the essential income gap (Gap A).  The SWP income component offers the flexibility and control needed to meet discretionary spending needs and potentially protect the retiree’s income from inflation. The annuitized income component protects against longevity risk and provides more income per dollar invested than the systematic withdrawal plan due to risk pooling and mortality credits. The managed account then benefits from a lower systematic withdrawal rate, which has a significant impact on the duration of the remaining portfolio’s longevity, and if the client lives long enough, an annuity component can actually preserve the value of the estate over time rather than reduce it.

Review retirement income plans every year.

As a general rule, retirement income plans should be reviewed at least annually.  It is particularly important to observe variances between assumed and actual expenses and investment experience in the first five to ten years of retirement, as it will be easier to adjust at that time versus in the last five or ten years. In addition, life expectancies change with the passing of time and changes in health status. The retiree’s circumstances may change, as well as his or her risk tolerance. Income sources (portfolio assets) will also need to be rebalanced, and new retirement products and income management approaches will be introduced.

The retirement income management process for the middle affluent and middle mass markets require a more defensive approach than most clients and planners realize and therefore needs to go beyond managing assets and systematic withdrawal plans. An entire host of dynamic variables affects the income management outcome, including different types of risk (such as longevity, inflation, health care costs, investment), different types of products (annuities, long-term care and healthcare insurance), and different timing decisions (when to start Social Security, when to annuitize, when to quit working).

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Our courses help you help your clients secure their retirement income.

Topics below include setting targeted income replacement ratios based on income level, marital status, and phase of retirement; understanding how expenses and spending patterns change in retirement; Social Security; Medicare; types of retirement income products and income approaches.

Individual courses are $29 each and include access to:

  • the live or on-demand webinar
  • MP3 recording
  • the presentation handout for notes
  • exam for CE purposes with printable instant results
  • Free CFP®, CRC®, reporting ($15 value)


Part 3 - PROVIDE Retirement Income

A - HH - NO - Z

Advanced Annuity and Tax Strategies for Retirement Income
Curtis Cloke

How Much Can I Spend in Retirement? A Guide to Investment-Based Retirement Income Strategies
Wade Pfau

No Portfolio is an Island
David Blanchett

Advanced Strategies for Using Housing Wealth to Improve Financial Outcomes in Retirement
Barry Sacks

How to Make Your Clients’ Money Last Longer with Withdrawal Sequence Strategies
William Meyer

Off With Your (Rule of) Thumbs!
Michael Falk

A Holy Grail of Retirement: How to increase income and growth while improving liquidity
Curtis Cloke

Incorporating the Housing Asset in Retirement Income Planning
Shelley Giordano

Optimizing Retirement Income Solutions in Defined Contribution Retirement Plans
Steve Vernon and Wade Pfau

DOL Fiduciary Rule and Your Duty of Care
Blaine Aikin

Key IRA Changes Made by the SECURE Act
Denise Appleby

Reverse Mortgage for Purchase: Helping Seniors Buy a Right-Size Home with the Right Tool
Allen Chao

Guaranteed Income: The Forgotten Household Assets
David Blanchett

Managing Retirement Income: What Your Clients Need to Know
Kevin Seibert
Click on the links in the table above for detailed descriptions of courses pertaining to Retirement Readiness.