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According to the U.S. Census Bureau, 76 million baby boomers make up more than a quarter of the total U.S. population, and the Social Security Administration indicates that the number of retirees will double in the next few years, while the number of workers paying into Social Security will drop by more than a third. In 1935, the average life expectancy for a 65-year-old was 121/2 years, today it is 171/2 years, and your clients are most likely above average.
All of this indicates that the largest growth area in the financial planning profession will be asset distribution planning, managing clients' assets and spending patterns in the postretirement years. To prosper in the future, financial planners will have to be able to serve this segment of the market with some form of decumulation planning software. While a number of software firms, including EISI (NaviPlan), Financial Profiles and Morningstar are planning to release such software later this year, Impact Technologies Group was one of the first companies to market with a commercial decumulation planning program for advisers, Retirement Road Map (available as either desktop or web-based software).
Impact Technologies Group, founded in 1981, originally produced presentation and illustration software for the insurance industry, and that background is reflected in both the new retirement product and many of the firms using it. Impact later expanded into tools for estate planning, business planning, capital needs analysis, probability analysis, retirement planning and comprehensive financial planning. Currently, the firm sells its products only at the enterprise level. However, advisers could access Retirement Road Map directly or indirectly through such Impact clients as New York Life, Prudential, Metropolitan Life, Allstate, Nationwide, ING, Principal Financial Group, Hartford Life, GE Financial and AXA Advisors, to name just a few.
Retirement distribution planning may sound simple, but competent planners know that's far from being the case. The impact of all the unknown variables such as future rates of return, changing inflation rates, health and longevity are all magnified in retirement.
During the accumulation phase, clients can make adjustments in mid-course that a retired client, who no longer receives a salary, can't. Contributing an extra $5,000 per year to a 401(k) and earning an extra 1% or 2% per year on it can have a great effect on a 21-year-old's retirement, but it will do a lot less for a 65-year-old planning to retire next year. And the order of returns becomes much more important. The 21-year-old may average an 8% return over a 40-year working career: even if he encounters severely negative returns in the first few years, he has time to recover. However, an investor who encounters a bear market in the first few years of retirement can't recoup if there are no new inflows or adjustments to withdrawals.
CLIENT STUMBLING BLOCKS
Retirement Road Map takes a very simple approach to the complexity of retirement planning. Rather than creating a comprehensive product, which by definition would require detailed inputs, the goal was to create a quick, simple-to-use product that could help clients answer the question: "Do I have enough to retire?" says J. Maxey Sanderson, Impact's vice president of product development.
According to Sanderson, his firm identified some factors that impede clients' understanding of the asset distribution process, such as the length of time they're planning for. Sanderson claims that clients can easily visualize periods of five to 10 years, but have trouble seeing beyond that; hence, Retirement Road Map breaks down advice into digestible periods of time. Second, Sanderson says that clients think in terms of "today's dollars." If you tell a client that a 16 oz. T-bone steak will cost $19.95 per pound at the supermarket 20 years from now in 2026 dollars, they have no idea whether that's cheap or expensive. The software therefore lets clients set goals in today's dollars.
Clients are also often confused by the process of converting assets into cash flow. Many are used to thinking in terms of "monthly income." Sanderson says that Retirement Road Map addresses this by first looking at clients' monthly need in retirement, then at sources of income such as Social Security and pensions. Finally, it looks at the deficit, if any. Next, the program determines if other available assets can cover the shortfall. If not, a plan can be devised to save more or spend less.
Retirement Road Map also tries to accommodate a prospect's "comfort zone." A number of Impact Technology Group's institutional clients told them that wealthy individuals don't like being asked too many questions about their assets up front. They prefer to be told what retirement will cost first, and then they will discuss what assets are available to fund the need. As a result of this feedback, the program initially avoids asking for much detail by design.
DATA ENTRY
Based on the above parameters, data entry is swift and painless, and there are two levels: simple and more detailed. A simple plan requires few data points. Besides the names and dates of birth, you input a retirement age for the first to retire and a monthly income need, either specified by the adviser or estimated by the program. When income need is estimated by the program, the default assumption is that in the first phase of retirement (age 65 to 75), clients will require 90% of the specified income amount; 80% in the second phase (age 75 to 85); 70% in the late phase (age 85 and over); and 60% after the first spouse has died. The default inflation assumption is 3%.
The simple plan requires additional inputs such as current value of retirement plans (defined contribution plans and IRAs, although not defined benefit plans), the "value of current assets set aside for retirement," Social Security payments, if any, to be included in the model (either user specified of program generated) and "other retirement income."
The detailed-plan screens offer a bit more flexibility. When you enter the retirement need, in addition to specifying a fixed amount, or allowing the program to generate a need based on current income, you can enter a schedule of needs and wants (fixed and variable) that change with the different stages of retirement (early, middle and later years).
For example, you could say that at age 65, when retirement begins, the couple's basic lifestyle requires $9,000 a month with an additional discretionary need of $5,000. At 75, the clients' basic needs might increase to $10,000 per month due to higher anticipated medical costs, but because they travel less, their discretionary need drops to $2,500. At 85, basic needs might drop to $9,000 because all remaining debts are retired, and discretionary income might fall to $1,500, due to less activity. Finally, you could specify that the male client dies at age 92, while the female lives to age 101 and requires $7,200 per month for basic needs and $1,000 per month for discretionary spending. For couples, one can also specify the year of the first and second death, who dies first and the survivor's fixed plus variable costs.
While the simple screens only ask for current retirement plan holdings, the detailed version lets you enter additional annual contributions and apply annual increases to the contributions if desired. For "other income," the simple version only asks for the monthly income for each spouse, while the detailed version lets you specify at what age the "other" income will begin, how long it will last and if it is fixed or adjusted for inflation. A separate section lets you enter pensions and/or other defined benefit plans. Here, you can designate starting date, inflation adjustment (if any), and percentage to surviving spouse (if any).
PROJECTIONS AND RECOMMENDATIONS
After inputting this initial data, the adviser saves the file and hits the "Proceed to Recommendation" button. This takes the user to a page that projects three distribution methods for qualified retirement plan money: as-needed distributions, level distributions and required minimum distributions.
The adviser selects a method and proceeds to the next screen, where he or she can choose to apply some of the clients' assets to purchase an annuity and illustrate the results. Advisers can choose to integrate the specific products into the illustration or make their own assumptions. The next page allows advisers to illustrate the purchase of permanent life insurance to fund survivor needs, followed by another screen to illustrate a long-term-care-insurance purchase if desired. Finally, by checking a few boxes, advisers can add some generic recommendations to the plan, such as repositioning assets or further analyzing retirement plan options.
At this point, you can generate a report that includes general information about the asset distribution process, as well as the generated illustrations. The report discusses the life cycle of retirement, dividing it into the three phases plus survivorship, and assumes different needs for each phase. Advisers have the option of including additional topical information concerning inflation, longevity and the relationship between risk and return.
Retirement Road Map is somewhat unique in that it suggests mapping the asset allocation to the different retirement phases. For example, when someone retires, the money allocated to supporting the early retirement years will be needed soon, so it should be invested very conservatively. Money needed to fund survivorship might not be needed for 30 years, so it can be allocated more aggressively. There is an illustration that shows all of the phases of retirement, with a different allocation for each, making it easy for clients to grasp the concept.
The overall design and presentation of the written report is highly professional and pleasing. The optional report pages, covering topics such as longevity, inflation, timing of returns and risk versus return provide can add substantial value. I particularly like the idea of presenting the asset allocation in phases to conservative clients. In a few brief tests, I found it to be an effective behavior modification tool. The road map approach and the general explanation of asset distribution concepts are very well presented.
The other strength of the web-based version is its ability to document everything for compliance purposes. With the exception of plans printed in the draft mode, all output is copied and saved on Impact's servers. Supervisors can review the history and see exactly what each employee has been up to.
JUST THE BEGINNING
I wouldn't consider Retirement Road Map the end of an asset distribution planning process; it's more of a good beginning. Since the program is specifically designed for simplicity, it's not really fair to criticize its lack of comprehensiveness, but the lack of a probability analysis is a serious flaw. The Retirement Road Map calculations assume steady rates of return, which we all know don't exist in the real world. While the asset allocation by period is a partial defense against a bear market at the beginning of the retirement period, it would be much more educational and probably useful to apply a Monte Carlo analysis, or some similar technique, to the projections.
It also concerns me that the only added planning that advisers can do, besides picking a distribution method for qualified plans, is insurance-related. The benefits of insurance-related products should not be minimized, but they are not a cure-all either.
In fact, there is very little actual planning that can be done with Retirement Road Map. You can educate the client and illustrate the impact of various insurance products on their current situation, but you can't, for example illustrate the impact of a change, such as saving $10,000 more per year or retiring three years later side-by-side with the "current" plan.
In the final analysis, Retirement Road Map partially delivers on its promise to help clients determine whether or not they have enough to retire. It only gives a single answer based on the assumptions entered. If inflation, rates of return and the order of returns vary--and they will--Retirement Road Map will not offer a range of possible outcomes, and that limits its usefulness. In spite of this flaw, Retirement Road Map can be a helpful tool for getting these issues in front of prospects and clients. Just beginning the conversation may benefit the client a great deal in the long term. As a conversation opener, and as an educational tool, Retirement Road Map seems to be extremely helpful. With a few tweaks, it could become a truly useful planning tool as well.
Joel P. Bruckenstein is a technology consultant to advisers and publisher of Virtual Office News, a practice management and technology newsletter. He can be reached at joel.bruckenstein@gmail.com.
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