Most people would agree that mountain climbing seems like a dangerous endeavor with many associated risks. What most non-climbers may not know, however, is that the descent is more dangerous than the climb. Professionals plan and prepare for as many eventualities as they can and use experienced guides who are familiar with the mountain to assist in making both the ascent and descent successful. Research suggests that more accidents and deaths actually occur on the way down than on the way up.
It’s possible to look at accumulating for and spending in retirement through a similar lens. Your clients spend much of their lives working toward building their savings until they reach the “mountain peak,” which is their retirement date.
Although this might be an oversimplification, determining the allocation of assets, the correct withdrawal rate and the order of assets from which to withdraw for retirement income—the descent—is critical to the success of the plan. Possibly even more so than during accumulation as there are many potential risks and other influential factors that complicate the picture. Unfortunately, addressing retirement income is not simply reversing the same strategies and using the same set of tools to manage those potential risks—a formal retirement income plan is necessary to help clients reach their goals.
This process starts with identifying the clients that will benefit the most from learning about your program and philosophy. While it is never too late nor is it ever too soon to plan for retirement, the ideal couple would be in their early 50 s or at least 10 years from their retirement date. This allows time for the client to make any adjustments required to accumulate the assets necessary and employ the strategies that will support their lifestyle in retirement.
It is important to note here that in order for any of this to work we have to listen to the client and determine what their ideas about retirement are, not assume or set financial goals based solely on what they are earning now. Next, you’ll need to devise a strategy on how to generate interest with these ideal prospects/clients. Determining whether a client seminar on Social Security or retirement planning would be more effective should be based on your skills (or that of the companies that will partner with you for client seminars) and how you believe your current clients would be in either a group or individual setting to learn more about these subjects.
Once you have generated the interest and started the discussion, the next step is helping your clients understand the risks to their retirement security. To do so, it’s beneficial to break them down into specific categories:
Longevity risk. Most of your clients probably already know that they’re going to live longer than past generations as life expectancy is increasing. In fact, according to Dr. Laura Carstensen, founding director of the Center on Longevity and author of A Long Bright Future, those of us living today could outlive our 20th-century ancestors by as many as 30 years. But, what they may not be thinking about is how living a longer life means retirement will last much longer, too.
According to the Insured Retirement Institute, there is approximately a 94% chance that for a married couple age 65, at least one of the two will reach nearly age 80, and approximately a 61% chance that one will survive to about age 90.
Market risk. As a financial professional you are aware of market volatility and the negative effects it could have on your client’s portfolios.
But what many clients may not be aware of is the dramatic effect the sequence of returns can have on a retirement account during the distribution phase. Sequence of returns refers to the order in which your client’s investment returns occur. The risk of receiving lower or negative returns early in retirement as withdrawals are being taken can significantly impact the longevity of a portfolio.