From the peak boomer earning years of the 1980s to around 2012, the planning industry was hyper-focused on growing the proverbial nest egg. But now it's time to make omelettes.
In other words, boomers are entering the phase of their lives where income and decumulation of assets are the focal points of their retirement planning strategies. But there's a shortage of useful tools for financial planners to help their clients deploy those hard-won assets in meaningful ways that still allow them to feel secure, said Frank Riccio, executive vice president and head of field sales at PIMCO, and Brian Kyle, senior vice president and regional head of internal sales, at the annual forum of the Investments & Wealth Institute, held last week in Tampa, Fla.
“We’ve come up with, as an industry, plenty of products and services and heuristics and short cuts to help investors stay on track to invest,” Riccio admitted during a panel entitled “The Retirement Advisor: Goals-Based Decumulation.” “But about three years ago we realized that about 60% of the assets that we manage is on the retiree side.”
That realization led PIMCO to create a framework for decumulation called “Income to Outcome,” which it hopes will address the gap between the appeal to clients of the goals-based approach of spending and the challenge of turning theory into practice at the planner level, Riccio said.
During accumulation, many planners have had to help their clients overcome biases again thinking about their assets in different buckets, he said. “We’re going to take full advantage of that,” he said.
Riccio and Kyle said they combined the liability-driven investing on the institutional side of PIMCO with the return investing of the retail side, and built a system anchored to dual, dedicated portfolios.
“You have a dedicated paycheck portfolio for near-term income replacement. This portfolio can be qualified accounts, it can be non-qualified, that’s totally your decision,” Riccio said. “But these are segregated assets that you’re going to put in a lockbox, essentially, that your clients would spend in retirement during those critical early years, and we hope they frame peace of mind on that side of the portfolio knowing that this is that dedicated paycheck.”
That should unleash the advisor to then continue to bring value in growing the second dedicated portfolio, which is for legacy however the client defines it, he explained.
“One of the things we’ve identified when you have these segregated portfolios, conversations around less liquid investments, private investments on the debt and equity side, become much easier because that’s framed on the growth side in the mind of the client,” Riccio said. “So it’s a tool for practice management as much as it is a tool for planning for retirement with your clients. When you give us a portfolio to analyze with our tool, we are not rethinking the asset allocation breakdown. We’re rethinking the underlying investments, and how to place them in the mind of a client. But we are right on top of the efficient frontier.”
According to Kyle, this Retirement Planning Income Tool, which sits on the PIMCO Pro platform, is “lite” in that it should only take an advisor around three minutes to input the key data points. From there, the advisor can sit with the client on the same side of the desk to answer about 10 questions.
The tool itself addresses four key channels: near-term income for spending, mitigation of sequence risk and investor loss aversion, a roadmap to social security maximization, and earlier conversations around legacy planning, Kyle said.
“We’ve emphasized near-term income as you make that transition to retirement, but we also know there’s a lot of common behaviors that could come into the fray, especially during period of volatility, specifically loss aversion, that can be real headwinds for investors,” he said. “And that overall sequence risk that is out of our control when we retire, is another thing we hope to be able to alleviate a bit using this framework.”
Imagine retiring in 2006, only to be hit with the financial crisis in 2008. “People who left the stock market completely by going to all cash and then returned just five years later never recovered,” Kyle said. The chart he used for illustration depicted total assets by July 2019 of roughly $300,000, while those that stayed in the market at a rebalanced level of 60% bonds and 40% stocks ended up with three times as much, about $900,000. And those who stayed in without changing a thing (assuming 60% stocks and 40% bonds) had accumulated four times as much, or $1.2 million.
“Running for the exits can backfire,” he said.
Regardless of retirement age, encouraging a client to delay Social Security as long as possible usually is a best practice, as “by maximizing those benefits, you’ve really insulated against that longevity risk,” Kyle said.
Both Riccio and Kyle said advisors should tap into the indicators that clients for the most part really do want to fund a legacy goal, even a modest one, and open up this conversation early to advance the idea of a more conservative portfolio for income replacement living side by side with a more aggressive portfolio to fund that legacy, which might be another 20 or 30 years in the future.
According to the panelists, four in five survey respondents have a legacy goal, with 64% indicating it’s a spouse, 54% indicating future generations and 21% indicating charitable interests. And two in three said they were willing to make changes in their plans to enable larger bequests, including spending less in retirement (34%) and allocating assets differently (27%).
“The ultra-high-net-worth clients, the $10 million and up, tend to be over-allocated to safe assets because they feel like they’ve reached the finish line,” Riccio said. “But if you can frame the finish line as their legacy, then that portfolio mix is going to look different.”