As millions of Americans transition from full-time work into retirement, they move from the life stage of asset accumulation to a new stage: distribution planning -- repositioning their assets to provide an income they will rely on for the rest of their lives.
The impact of this shift cannot be overstated. For most advisors, this generation represents a significant portion of their current book of business and nearly all of their future business. This group needs to plan for a retirement that could last for more than 30 years. So it's not only those close to retirement but an entire generation of baby boomers who may need your professional help to ensure that their portfolios will provide income for a lifetime.
There are several key risks that can undermine the success of your clients' retirement income plans: longevity, inflation, asset allocation, their withdrawal rate, and last, but certainly not least, health care expenses.
Underestimating the risk
Many people underestimate their life expectancy and therefore risk outliving their assets. The facts indicate that at least half of the population may outlive the average life expectancy. A successful lifetime income plan helps your clients prepare for living well into their 90s. There is a very real possibility that clients will live 20, 30, or even 40 years in retirement. The anticipated longer retirements and the impact of inflation make it more crucial than ever that portfolios include investments with the potential to out-pace inflation. It's also of paramount importance to provide protection for that income for the surviving spouse in the event of long term care expenses for an unhealthy partner.
Many retirees think that they need a conservative portfolio, but this could create a heightened risk of outliving their assets given the anticipated length of their retirement. A key to long-term success may lie in balancing portfolio income with portfolio growth.
Obviously, a conservative withdrawal rate would dramatically increase the likelihood that retirees won't outlive their assets. Advisors need to help clients understand how much they may need to save in order to meet their retirement lifestyle goals and what is a realistic withdrawal rate. Rising health care costs coupled with inadequate medical insurance coverage can have a devastating effect on a lifetime income plan. Addressing this risk may mean targeting savings specifically for health care and purchasing long term care insurance.
Fearless 40s
Approaching the pre-retiree market may make more sense if we divide them into age groups. Let's consider the first group: ages 40 to 49. These are the youngest baby boomers. They are too busy to think much about retirement planning right now. They have multiple financial goals, including college savings, retirement, children's needs, and housing costs.
The important risks to discuss with this group are longevity and asset allocation. They need to understand the value that extra years of compounding adds to their savings. They should also be coached on a growth-oriented portfolio so they can take advantage of long-term equity performance. Broach these issues during an interview by asking:
o What events could capsize your current retirement savings plan?
o Has market volatility affected your savings?
o Will you be paying college tuition for your children?
o How would you prioritize all of your different financial goals?
Possible solutions to these issues are:
o Risk tolerance and subsequent proper asset allocation
o College savings planning
o Health insurance
o Life insurance
o Disability insurance
o Deferred variable annuities
Frugal 50s
The next segment are your clients who are 50 to 59. They are now beginning to think about retirement and do not know whether they have saved enough. They don't know how to put together a retirement income estimate themselves, and they are concerned about life changes: kids leaving home, aging, and new goals and directions.
You should be discussing longevity with these clients, an appropriate strategy that might provide for growth until retirement age, and how they will meet their needs during a long retirement. They should be looking at transitioning their asset allocation plan to take advantage of the next five to 15 years until retirement.
Now is the time to discuss life and health coverage in retirement, including obtaining long term care insurance, discontinuing disability insurance, and the options for supplemental health insurance coverage at retirement. Questions to spark a discussion include:
o Did you know that at age 65, either you or your spouse has a 50 percent chance of living to age 92 and a 25 percent chance of living to age 97?
o Do you know how much you will be spending in retirement?
o How is your long-term portfolio holding up?
o Do you feel comfortable about your retirement savings plan?
Possible solutions include:
o An asset allocation review
o Taking advantage of catch-up provisions in their IRAs and employer-sponsored plans
o Consolidation of assets for more efficient management
o Fixed or variable annuity products (now might be a good time to discuss living benefit riders on variable annuities)
Sensible 60s
Lastly, your clients who are 60 to 69 years of age might be wondering whether they have saved enough for retirement, what their health prospects are, and how much they can provide to their children and grandchildren.
Issues to discuss would include planning for the possibility that they will live longer than they think, asset allocation review, health care coverage, and the risk of inflation eroding their spending power. Open your discussion with questions such as:
o Can I help you determine how much you can expect to receive from Social Security or your pension?
o Would you like to help fund your grandchildren's education?
o Have you thought about protecting your spouse or partner if something should happen to you?
o Can we discuss the retirement income potential of your portfolio?
Possible solutions to these issues are:
o Asset allocation and diversification
o Catch-up provisions for IRAs and employer-sponsored plans
o Consolidation of assets for more efficient management
o Assessing their life insurance coverage
o Long term care insurance needs
o Annuity laddering
o Conversion to a Roth IRA
o Checking beneficiary designations for all accounts
o Discussing required minimum distribution options
o A health care power of attorney or living will
o Systematic withdrawal plans
o Estate planning considerations
The transition from full-time work and asset accumulation to retirement and asset draw-down brings on a new set of financial decisions. The main challenge -- achieving lifetime income solutions -- is a serious one.
As an advisor, it's important to know the issues and position yourself to discuss each set of concerns with your clients at the appropriate life stage. Engage them in the process and show them the solutions to the issues. Best of all, you will know that you have provided them great value that will last a lifetime.
Shelley Kostrunek, CMFC, CRPC, CLTC, is a senior investments products consultant in Mutual of Omaha's advanced markets area. She can be reached at shelley.kostrunek@ mutualofomaha.com.
