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 20^th-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.

Since we can’t predict how the market will perform—or when, the effects of the sequence of returns makes it difficult to plan for consistent retirement income that will last for a couple’s lifetime. One of the possible solutions to address sequence of returns risk would be to use investments that are less affected by volatility or provide guarantees to cover essential expenses.

Inflation risk. Most clients are aware that purchasing power in retirement will decrease over time as inflation rises—particularly if their income doesn’t also increase to meet rising costs. If history provides us any perspective at all, we should expect health-care costs will increase at a greater rate than other costs during retirement. The real impact comes when you consider that health care becomes a larger proportion of total expenses as people age.

According to the Kaiser Family Foundation and HRET Survey of Employer-Sponsored Health Benefits, from 1999 to 2018, overall inflation rates have eroded purchasing power by 51% and health-care premiums for family coverage have increased 239% over the same time period. Using simple mathematics even at a modest 3% inflation rate, the cost of living will double over a 24-year period of time.

Clients will be counting on you to provide guidance and alternatives that can address all risks. Social Security is one form of guaranteed income that has a cost of living adjustment. The question to ask your clients and yourself is will this be enough to address inflation for all of your client’s fixed expenses during a 30 or more year period? If not, you’ll need to look for other investments that offer guaranteed income with possible increases all throughout the planned distribution phase.

Utilizing The VIP Process

So how can we help clients feel more at ease in dealing with these risks? Make them feel like a VIP by showing them how “VIP” fits into their financial planning process.

In this case, “VIP” stands for Value of Income Planning, and refers to a simple 5-step process that can help clients identify expenses, sources of income, risks and possible solutions to consider when planning for the other side of the mountain.

Step 1—Review Expense Categories: Start by helping your clients identify the three main types of spending in retirement that comprise their overall retirement expenses:

Essential—the “needs” or essential expenses for basic necessities such as food, clothing and shelter, as well as health-care costs, taxes, etc. These are the “must haves” they simply can’t ignore.

Discretionary— the “nice to haves” or “wants” such as travel, club memberships, gifts and entertainment. The fun stuff that was put off because of all the “adult” responsibilities they can now pass on to their children.

Legacy— their “wishes,” such as trust funds for grandkids, helping to pay for college, charitable giving or their desire to create a financial legacy to last for generations.

Step 2—Identify Income Sources: There are two main categories of income:

Asset-based—including nonqualified (after tax) assets, traditional/Roth IRAs and defined contribution plans (401(k), 403(b), etc.

Income-based—including continued employment, annuities, pension (defined benefit) plans and Social Security

It’s important that your clients understand that essential expenses should be covered first using dependable/reliable, guaranteed income. After all, those are the expenses that they must cover regardless of market conditions or other influences. A second consideration is that these expenses will increase over time. Investing in guaranteed income that has the potential to increase—not just in the first year but throughout retirement—can be critical for success.

Step 3—Determine Social Security Strategy: Although there are several sources of income in retirement, the main source of retirement income for most is Social Security. It is often known as the foundation of retirement income sources because the majority of retired Americans rely on Social Security benefits for at least a portion of their retirement income. It provides a dependable source of income that Americans will rely upon and, in most years, includes a cost of living adjustment.

However, in general, studies indicate that Social Security alone cannot provide sufficient retirement income. It was designed to be a supplement to retirement income not the main source of income. Therefore, it is important that your clients know the options available for filing for Social Security benefits in order to enhance their benefit as much as possible.

Three are many considerations when filing for Social Security, including: when to start taking benefits, based on health, longevity projections, and marital status; how new rules and regulations have affected benefits; and how survivor or divorced spousal benefits work in specific situations. Becoming familiar with a Social Security calculator, whether the one provided by SSA or a proprietary one, that can illustrate different options will allow you and your client to make an informed decision on what strategy may best suit their estimated needs.

Step 4—Identify Income Gaps: Once your client has evaluated (and hopefully enhanced) their Social Security benefit, the next step in the VIP process is to identify potential income gaps. This is most effectively done by having them complete an expense worksheet, separate the expenses into the categories mentioned above and then align the essential expenses with identified guaranteed income. Subtract essential expenses from current or expected guaranteed income (Social Security, pensions, annuities, etc.). The difference remaining is either a surplus (that’s great and highly unusual) or, more likely, an income gap. You can use any worksheet and/or your own financial planning software to uncover any potential income gaps your clients may be facing.

Through this process, you will be able to help clients identify any retirement income shortfalls or gaps. But be sure to check with your own compliance department regarding which forms or tools have been approved for use.

Step 5—Develop A Solution: If your client’s income sources do not cover all their essential expenses and they have a retirement income gap, you should develop a tailored solution together, with a main goal of creating dependable guaranteed income to cover their essential expenses. If appropriate, you could also discuss a financial strategy that may help them cover their discretionary income and also fulfill any legacy wishes.

Annuities can be part of this discussion as they can help meet long-term retirement goals by offering tax-deferred growth potential, a death benefit during the accumulation phase, and a guaranteed stream of income at retirement. It’s crucial that clients have a plan to fund essential expenses with sources of dependable income, and annuities can help supplement Social Security income as a reliable source. I can’t emphasize enough that there has to be a plan in place that will increase this guaranteed income stream over the life of each of the clients either as an increase built into the product or another supplemental source—otherwise the plan will fail.

By using the Value of Income Planning process to engage with your clients about retirement income, you can provide a holistic review of their financial income plans and discuss all of the available options for meeting their expenses in retirement. This can help your clients set realistic expectations about their income and expenses, and feel more confident about their overall retirement security.

With these actionable steps, you and your client can work together as a team to get an income strategy in place. This should help them feel more comfortable with spending in retirement and more prepared to start descending their retirement income savings “mountain.”

Kelly LaVigne is vice president of advanced markets at Allianz Life.