Retirement income planning is gaining traction with the public and among advisors as a practice specialty. In November 2013, USA Today ran an interview with the director of The American College’s Retirement Income Certified Professional (RICP®) designation, which launched in 2013. It’s been a good first year for the RICP: over 3,000 participants, including this writer, had enrolled in the program by late 2103. Advisors can choose from other professional educational programs aimed at retirement income planning as well. The International Foundation for Retirement Education offers the Certified Retirement Counselor® designation and the Retirement Income Industry Association has developed the Retirement Management Analyst(SM) program.
Given the proliferation of certificates and designations available in the financial advisory business, it’s fair to ask if the world needs more sets of initials to list on business cards. Critics can argue that income planning is just another phase in retirement planning and doesn’t merit specialized study. Advisors already help clients accumulate assets for retirement, so what’s the big deal about shifting from accumulation to distribution?
Littell cites additional risks that retirees face that they may not have encountered or considered while working. These include inflation, health-care and long-term-care coverage, frailty and incompetence. Financial risks also change after retirement and sequence-of-returns risk is one of the most critical.
Much of the retirement income planning research has focused on sustainable portfolio withdrawal rates. The goal is to estimate the percentage of a portfolio’s value can clients withdraw annually ‑ without depleting their funds too quickly. Research has shown that once clients start taking withdrawals, the portfolio’s returns during retirement’s early years have a major impact on its sustainability. This is the period when retirees are most exposed to sequence-of-returns risk, Littell explains. “If the market is bad for the first few years of retirement, you’re going to run out of money much quicker unless you have some system or some plan for addressing that,” he says. “So, one of the big differences between accumulation and decumulation is that particular risk.”
The discontinuation of DB plans has led to a disconnect with employees’ needs. The “2012 Prudential Retirement Plan Participant Survey” found that three out of four DC-plan participants felt it was important that their workplace retirement plan include a guaranteed income feature. In other words, employees are still want a lifetime income option—i.e., a pension replacement—to ensure they don’t outlive their assets.
Financial services firms recognize the market opportunity this desire creates and have started offering in-plan retirement income solutions. Some solutions provide systematic withdrawals through professionally managed accounts; others use immediate annuities; another approach offers guaranteed minimum withdrawal benefits (GWMB) to combine systematic withdrawals with an annuity. Prudential Retirement’s IncomeFlex Target® product is an example of an in-plan, guaranteed retirement-income solution that utilizes GMWB. IncomeFlex was designed specifically to help employees transition from the accumulation phase to the income phase by converting their account balance into a lifetime income stream, according to Harry Delassio, senior vice president, strategic relationships with Prudential Retirement in Hartford, Conn. Great-West and Transamerica also offer in-plan GMWB products.