Retirement income planning: advisors face new challenges
For retirees and their advisors, the mantra today is often about savings distribution – not income accumulation. The emphasis is on reliability of the income stream, not necessarily ROI — the rate of return, as it was in the accumulation phase.
Surveys today show that especially following the Great Recession of 2007-2008, a growing numbers of investors are fearful of either not being able to retire when they thought they would or of outliving their assets due to increased longevity estimates.
“Overall life spans are increasing,” says Ben Harris, a fellow and the deputy director of the Retirement Security Project at the Brookings Institution. “A 65- or 70-year-old faces a very difficult question: how to spend or draw down their assets, given their uncertain life span.”
Many clients now demand from advisors some form of guaranteed income for their retirement years more than what their IRAs, 401(k)s and Social Security benefits currently offer.
“In the old days, when people had real pensions there was no need to decide how to convert that money into income; it was all done for you,” says Tony Webb, an economist at Boston College’s Center for Retirement Research. “Now with the rise of self-directed 401(k)s, people are facing the need to turn their pension nest eggs into lifetime income streams.”
Michael Falk, CFA, a partner at the Focus Consulting Group in Chicago, says the retirement conversation today is being driven by the collision of two major statistics: the growing ranks of baby boomers who are retiring and the persistent low interest rate environment.
Investors have been drawn away from common investments that formerly had respectable yields, says Falk, who is also a partner and chief investment officer at Mauka Capital, a hedge fund. “A 2.5% yield on a 10-year Treasury note is not what [investors] would have gotten, 10 or 20 years ago,” he says.
As the first line of defense against black swan events like 2008, Falk recommends advisors help clients generate a level of guaranteed income that covers at least their fixed expenses in retirement, which could derive from Social Security, a pension, a laddered bond portfolio, or an annuity contract.
“Immunize before you optimize,” says Falk. “If your clients immunize their fixed expenses they have more control. If the market has a good year they can spend a little extra. If the market has a 2008, they spend a little less, but they’re still covering their basic costs, which means retirement will be more peaceful.”
Bruce W. Fraser, a New York financial writer, contributes to Financial Planning magazine.