What methods are you using to determine the retirement readiness of your clients?
This is an aspect of financial planning that is a pretty simple math problem. When clients are working, it’s the income that drives their lives. Once they are retired, it’s their expenses. Most people do not have a good understanding of what they actually spend, even people who are good with investing and money. Therefore, it’s critical to get a baseline on current spend and then work up or down off of that for required retirement income. If retirement is optional, I don’t buy heavily into the needs versus wants notions but I do know that people have tremendous flexibility over reasonable time horizons. Once we get the spend, then the math problem can be solved. How much annuity income do they already have, and by this I mean an employer pension, yes, those still exists, and Social Security. There will usually still be a gap. That is what I mean by expenses drive retirement life. To fill that gap, it’s a simple math problem based on what the deployed withdrawal rate off a portfolio. I use 4 percent as I still believe it’s conservative. This tells us when a person or couple is financially independent. As George Foreman once quipped, everyone can retire, the question is at what level of income.
What sort of training and education is needed for advisers to meet the needs of their retirement income clients?
I think they need basic math abilities, the ability to run a financial calculator and understand what it means, and an independent and inquisitive mind that allows them to develop sound beliefs on retirement income planning. I said above that I use the 4 percent rule and see it as conservative. I have theoretical and empirical reasons for this. More-insurance based advisors might buy into Moshe Milesvski’s and Wade Pfau’s more pessimistic views on withdrawal rates. I don’t, but I can’t say for sure they will prove wrong. I just think they are highly unlikely.
It’s not as complicated as speaking circuit gurus and purveyors of financial products and their intellectual retainees would have you believe. People have been retiring and living off assets for years and they’ve been living long for years. Go into Morningstar and run hypos on Income funds, the old ones run by Vanguard, Franklin and American and see how people fared in other times of stress. It’s very encouraging.
What does the next decade hold in store for retirement-focused advisers? And how should they prepare for that?
I expect it will be a good decade as it’s a service many Americans find valuable. I believe that, at our best, we are boutique craftspeople, and that’s why the robos and mega companies with standardization requirements and lots of VPs to pay will struggle to compete with us. NYT columnist Tom Friedman once said success in this century requires the work ethic of an immigrant with the pride of a craftsperson who stamps her name on the product. We stamp our name on our product. That’s what required now and what will be required in the future. It will not emerge from a computer algorithm or from a corporate training program. John Henry one of my favorite Johnny Cash songs. I’ll die with this hammer in my hand. I think we beat the machines.
What are advisers doing to make sure they have managed/mitigated many of the risks their clients will/may face in retirement. (I’ll likely reference RMA and SOA list.)
What retirement-income strategies are you using in this low low interest rate environment? SWPS, buckets, asset-liability matching, or something else?
Same as higher interest rate environment. People need three things. Safety of principal, reliability of income and growth of income. Unfortunately, these are in tension with each other. Things that protect principal don’t provide reliable income and the income will generally not grow. Things that provide reliable income, annuities, tend to not grow with inflation. Vehicles that grow income at a rate greater than inflation, equities, do not protect principal and the income will not always be reliable. Therefore, most people need a combination of these vehicles to get where they want to go.
Get three to five-year expenses in the safety of principal bucket, and income reservoir like a water reservoir out west, to create income in a financial drought. Use SS and perhaps a deferred annuity with an income rider for reliable income, and then a equity based total return strategy to grow asset and income over time.
People are worried about health care costs in retirement, and Alzheimer’s (more so than COVID). What must advisers do given that?
In my experience, health care costs are overblown as an issue, provided a person makes it to Medicare and is eligible, which is the case for most people. This can be budgeted for and at point of use there are very few expenses. Low income people get it for free as they are dually eligible for Medicaid and state-based programs.
The real issue is paying rent in the wrong kind of hotel. That’s long-term custodial care. It, too, is overblown in industry marketing, as most people don’t need it or use homes for short term rehab. But nevertheless it is a real issue and the one true risk to middle-class wealth in America. In the old days, we’d use LTC Insurance and it’d solve the problem. These old policies are going up in price but still often a great value. Unfortunately, that market has fallen apart so now we look to more planning-based solutions like gifting assets, trusts, and really having a Plan B to act on when the need arises. I call it the lifeboat drill. Most clients have been on a cruise. The first thing that happens is that people go to a lifeboat to see where they will go it something bad happens. I think I stole this from Nick Murray who uses it in the investment context. The idea is that there is a plan to act on should bad things happen.
The wealthy are living longer. What does that mean for their retirement income plans?
Inflation is a larger risk the longer on lives. They need more equity exposure to combat it, not less.
To what degree should advisers be creating a retirement policy statement (similar to an IPS) for their clients, and what are the elements of that document?
I think this is probably overkill, but then if it works for some advisors with some relationships I’m all for it. I use written annual financial plan updates that are memos and that detail and asset and income plan. I guess this is a sort of income policy statement.Is there a need for planners to become behavioral coaches to their clients? What does that mean/entail/look like?
I put this in the overkill pile as well. I need my mechanic to fix my car, not read me poems, and my dentist to work on my teeth, not wash my car and provide a foot massage. Yes money does interplay with the softer aspects of life. But surveys show that it’s advisors, not clients, who think this is an important service, at least one I’ve seen that Kitces wrote up. Also, studies show individuals actually do quite well in market declines. I suspect but can’t prove that they are less prone than advisors to moving stuff at the wrong time.People want to find purpose in retirement. What can advisers do in this regard with their clients?
We help them understand what they can afford and how to get it tax efficiently and grow it. Again, I think this issue is overblown. My clients, and I have a lot, don’t ask me what they should do for fun and meaning. They may ask for a travel tip now and again, but they have meaningful lives with family, friends, community and yes sometimes part time work and retirement is just an extension of that.Online tools are changing the landscape for advisers and investors. What’s happening, what’s good, what’s bad, and what’s too early to tell?
Online tools provide information and lower the transaction costs to getting it. It makes the market more competitive and that’s a good thing. Per Nobel laureate Ronald Coase in world of zero transaction costs, there’d be no profits. So it should drive down price to the consumer. Options are good. Information is no longer scarce. It’s wisdom that is and people seek out people for that.
Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. He can be
reached at mlynch@barnumfg.com or 203-513-6032.
Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services,LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.
CRN202211-274663