4 Steps to Guide Your Clients into Retirement

Posted by Justin C. Duft, JD, CFP, MSFS, CLU, ChFC, CLTC

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June 2, 2015 at 10:00 AM

guide your clients into retirementAs baby boomers enter retirement, advisors are experiencing a sea change in their practices. Those who have focused on accumulation and growth now have many clients transitioning to the retirement distribution phase. This means assets held in defined contribution plans, which are often significant, will need to be rolled over and managed by a competent professional.

So, are you prepared to take advantage of this asset-gathering opportunity and guide your clients into retirement? After all, the years leading to retirement can be an emotional time, and your clients may seek professionals who market themselves as "retirement specialists." But by developing a retirement income planning process, you'll be well-positioned for the challenge of helping your clients achieve their retirement goals.

1) Position Your Expertise

The financial advisor is typically perceived as someone who helps clients grow their money. But as clients get older, many wonder if they'll have enough funds for retirement. According to an AARP survey, in fact, 72 percent of boomers expect to delay retirement because they are financially unprepared. Further, half of those surveyed believe they will never be able to retire.

Start the conversation early. Given boomers' anxiety level about retirement, discuss the distribution phase before the time comes. For example, if your clients plan to retire in their mid-60s, introduce the topic when they're in their mid-50s. This doesn't mean providing distribution strategies 10 years in advance. But it does require evaluating your clients' projected retirement time frame and income expectations. Is their vision of their retirement lifestyle unrealistic given their asset levels? If so, you may need to:

  • Consider modifying their accumulation strategy
  • Encourage them to accept the realities of their financial situation

By starting this conversation early, you'll set the stage for more detailed conversations going forward—and potentially stop clients from taking the conversation elsewhere.

Consider retirement-focused credentials. Boosting your credentials can help you demonstrate commitment to clients who are preparing for retirement:

  • Certified Retirement Counselor® (CRC®). Developed by the International Foundation for Retirement Education and accredited by the National Commission for Certifying Agencies, this program aims to help advisors demonstrate their expertise in serving clients' retirement planning needs.
  • Retirement Income Certified Professional® (RICP®). This is an advanced designation offered by the American College of Financial Services. Delivered via video, this three-course program involves a testing component for each course.

But whether or not you pursue a specific credential, remember to highlight your retirement planning expertise in your marketing materials.

2) Define Your Process

Of course, the retirement income planning process varies among advisors. Here's a general framework to consider. (You can download The Ultimate Retirement Income Planning Guide for Advisors for an in-depth examination of this process.)

Understand goals. No number crunching, data analysis, or product information is required. Your objective is to uncover your clients' hopes and dreams. Even if they have unrealistic expectations, take the time to truly listen. Otherwise, you risk damaging the relationship you've built over time—or jeopardizing a newly formed relationship. A good starting point might be outlining a retirement vision. That is, what do your clients expect retirement to look like?

Discuss risks. After you've noted your clients' goals and taken inventory of their assets and liabilities, discuss any plan risks. It's important for your clients to understand how risk is accounted for once they start drawing down assets:

  • Do they know how major health care expenses would affect their income?
  • Do they understand how inflation affects retirement assets?

Develop a distribution strategy. When it comes to distribution, each client will have different:

  • Challenges
  • Goals
  • Income sources

If a client has numerous accounts with different tax characteristics, you'll have a greater opportunity to be creative and flexible with the strategy. But be sure that you explain how different accounts work (e.g., brokerage accounts, 401(k)s, and insurance policies) and why you've decided to take income from certain accounts.

3) Evaluate Distribution Approaches

Another key to retirement income planning is determining how to convert your clients' resources into income. Three frequently used approaches are outlined below.

Systematic withdrawal plan. This is the most common technique and involves a basic percentage spend-down strategy. To start, you'll want to review all investable accounts and diversify the portfolio according to your client's risk tolerance. Then, working with your client, determine an acceptable percentage to withdraw for income (generally between 4 percent and 5 percent).

  • The goal is to sustain the portfolio over the client's lifetime.
  • Variables like life expectancy and risk tolerance will have a significant impact on the withdrawal percentage.
  • Combined with fixed income amounts from social security, pensions, and other sources, these withdrawals will constitute the total retirement income.

Bucket approach. Here, buckets of money are created and managed as separate portfolios. Each bucket represents a different retirement stage. A three-bucket approach is typical, but you can create as many buckets as needed to support different expenses.

For example, suppose you're working with a married couple who just retired at age 65. Healthy and active, they plan to spend the next 10 years traveling.

  • Create a 10-year bucket to match their short-term income needs (e.g., travel expenses). Because the time horizon is short, this bucket may include a conservative investment mix.
  • In the next stage, ages 75–85, they plan to slow down and reduce travel. They also anticipate increased medical costs. Manage this bucket according to the longer time horizon and expected income needs during this period.

Essential versus discretionary approach. To begin, separate vital expenses (e.g., housing, utilities, and health care) from discretionary costs (e.g., entertainment, travel, and gifts). Next, create guaranteed income for the essential expenses, seeking products generating income with little to no risk:

  • Annuities are commonly used.
  • Laddered bond strategies can be employed in conjunction with guaranteed income from social security and pensions.
  • After covering essential expenses, leftover funds fall into the discretionary account.

Your clients may find it reassuring that, at a minimum, they'll have enough money for their basic needs. But there are some drawbacks to this approach:

  • It generally takes a larger piece of the pie to create guaranteed income.
  • Discretionary spending is more severely affected than with the other strategies.

4) Factor in Social Security

Whatever the distribution approach, social security planning will likely be important, as these benefits often account for a large part of a retiree's income. In 2015, for example, the maximum social security payment an individual can receive, if he or she takes benefits at full retirement age, is $2,663 per month ($31,956 per year).

What is the best time to claim benefits? Many retirees take early social security benefits at age 62, which may cost them in the long run. Consider the following:

  • A client who retires at full retirement age with a benefit of $2,663 would receive approximately $1,997 if he begins benefits at age 62.
  • If he waits until age 70, this benefit will grow to approximately $3,515.

Clients with an average life expectancy are often better off deferring benefits to age 70.

Be the Go-To Retirement Resource

Coaching clients on how to efficiently spend money can be vastly different from coaching them on how to accumulate money. But the core building blocks are largely the same. Sound investment strategies and comprehensive financial planning still dictate best practices during the distribution phase of a client's financial life. These best practices will also help you be the go-to resource when it comes to your clients' retirement income planning needs.

What steps do you take to guide your clients into retirement? Do you believe a withdrawal rate of 4 percent to 5 percent still makes sense? Please share your thoughts below.

The Ultimate Retirement Income Planning Guide for Advisors

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