Covid-19 made maximizing retirement income the single most important financial decision of a client’s lifetime.
People’s eyes widen when I tell them that the rate of baby boomer retirements soared in 2020 from 2019, unmooring 350% more “money in motion.” As I’ve written before, after investors get their answers about Social Security and rollovers, they want to know how to get the most income out of the assets they’ve accumulated over a lifetime.
Boomer Portfolios Are Incoherent
With no new paychecks, retiring boomers must rely on what they have and what they can control. That means reducing their investment costs, managing risks, minimizing taxes and maximizing Social Security benefits. But of the $1 trillion of assets under advisement we see across 100,000 advisor clients, boomer portfolios are, to be kind, incoherent.
Investing for most of them up until now has been based on an idea that it’s a series of buy high/sell low decisions. Now they can’t go back. They can’t afford to screw up their retirement income.
A Nest Full Of Shiny Objects
Here’s the brief history of boomers “chasing the hot dot”: In 1979, cash management accounts offered 18% interest rates. Money poured out of banks and into brokerages. Savers became investors. When rates fell, trillions of dollars moved into bond funds in the ’80s so investors could keep their beloved double-digit yields. After the March 1987 bond market crash, they piled into stock funds, only to get smacked again in the October ’87 crash.
The 1990s saw the rise of separately managed accounts; saw investors chasing “outperformance”; and marked the rise of attractive, unsustainable annuity benefits. The 2000 tech bubble took investors to places where they thought trees were certain to grow to the sky. Everyone became a day trader.
Does this sound familiar? Separately managed accounts paved the way for unified managed accounts and models. Both are valuable individual products, but they are difficult to coordinate if you want to be mindful of cost, risk and tax.
How Do You Optimize Multiple Accounts, Advisors And Custodians?
The serial purchase of individual products over decades, usually from different advisors, was accompanied by boomers thinking they should not only be diversified in what they own but where they own it. The portfolios we see have multiple accounts, advisors and custodians. How do you optimize that?
Boomers have chased the shiny object for monster returns and a cushy retirement—only to be disappointed. Now, it’s up to their advisors to bring harmony to this pile of products and chart a decumulation strategy they won’t outlive. And if you could increase retirement income and quantify the financial benefit through managing cost, risk and tax, do you think investors would be interested?
The 4% Rule Is Irrelevant
We have all known for a while that an all-hands-on-deck approach is needed. In 2013, Morningstar talked about clients generating 22.6% more in “certainty-equivalent income” by making intelligent planning decisions along with household-wide asset allocation and location and optimized withdrawal sequencing.
With all due respect, the 4% rule was only intended to be a framing instrument for people thinking about leaving the workforce. The new normal for maximizing retirement income is known as a “unified managed household.”
The Answer Isn’t One Thing, It’s Everything
We are now at an inflection point where many vendors and enterprises are working together and have made the magic real—a unified managed household to solve the cluttered mess in most boomer portfolios. It’s a solution, not a product. And it’s available today.
We’ve already seen the solution take shape around a lattice of variables that investors and advisors can easily control through software. Wealth managers today have put together the following:
• Tools to identify cost savings and long-term tax efficiency across an entire household of coordinated accounts using asset allocation and location, tax harvesting, household-level rebalancing and an optimal sequence of withdrawals;
• Risk engines to spotlight opportunities and threats to long-term money goals;
• Tech to plot the best Social Security strategy in the context of the investor’s financial life and as a basis to create enhanced income streams; and
• Easy-to-understand outputs that show the benefits in dollars and cents.
The leading unified managed household platforms offer “all of the above.” This is new. Some of us in the industry have been busy connecting all these dots. The big players are done with “wouldn’t-it-be-nice” white papers. We’re rolling up our sleeves to help retiring boomers and their advisors “land the plane” at a time when they’ve never needed more help.
Jack Sharry is co-chair of the Money Management Institute’s Technology & Digital Advice community, sits on the Next Chapter Advisory Council and is the executive vice president of LifeYield.