When it comes to retirement income, bonds have become "useless." But using stocks instead is risky. That was the problem laid out by Wade Pfau, professor of retirement income at the American College of Financial Services, in a presentation this week.

“Telling clients that stocks will always bail them out is not realistic,” Pfau said during the second day of the Next Chapter 2022: Rockin’ Retirement virtual conference sponsored by Financial Advisor. “Advisors try to put a pretty face on risk,” but it will not always be avoidable, he added.

Retirees need a stable income, because stocks are not always going to rise, he said. But at the same time, investing in bonds is not an efficient way to fund retirement. A client is more likely to be able to fund his or her lifestyle with a combination of equities, annuities and other strategies.

In some ways, retirees with a reliable income floor are better off than those who possess wealth, because those who have wealth, but not a predictable income in retirement, may be afraid to spend the money they have, explained Michael Finke, another American College of Financial Services professor who spoke during the presentation.

“The goal in retirement is to fund the lifestyle you want, but we do not know how long that will mean,” Pfau said. Do advisors, he asked, plan for their clients to live to age 90, 95 or 100?

“A lot of retirees do not live as well as they should because they are afraid to spend, which sacrifices a lot” of pleasure, Finke said. Advisors need to help clients spend the money they worked to save when they have the ability to do so. “The 4% rule [that a retiree can spend 4% of the principal of their investments annually during retirement] may be too conservative for some. Advisors and their clients have to be flexible in their planning.”

Advisors also need to understand how each of their clients’ approaches to retirement differs and what strategy is best for each, Pfau said. Some advisors misunderstand what their clients’ income styles are and how those styles translate into different retirement strategies. For instance, does the client “want to build an income floor and then dip a toe back into the market,” or save for needs he or she will have later in life?

“A client only has two choices for using money in retirement,” Finke said. “Spend it or give it away. With risky investments, you hope to be able to spend more.” The retiree may “want to spend more in his 60s and 70s when he has health and cognitive awareness.” Or the client could want to save for later years. “Our goal as advisors is to translate what people want into retirement solutions.”

At the same time they are planning for their clients, advisors may want to rethink their fee structures. With more clients entering retirement, the assets under management can be decreasing for the advisor and reducing his or her income, Finke said.

The session was moderated by Michelle Richter, principal of Fiduciary Insurance Services and executive director of the Institutional Retirement Income Council. “Charging a fee based on AUM,” Richter said, “might be OK for advisors during their clients’ accumulation phase of life, but not for the distribution phase. It will be interesting to see how this plays out in the next 10 years.”