With the high cost of medical bills, it’s not surprising that health-care costs rank high on the respondents’ list of threats to their clients. Almost 50% view unanticipated health-care costs as one of the biggest threats their clients have experienced. Another 42% see a stock market crash early in retirement as their clients’ biggest threat, while 37% say the worry is about clients generating enough of a reliable income stream.
Indeed, generating a predictable income stream ranks second to outliving their assets as a concern of clients. But Fragasso says that’s because many people only think of income, dividends and interest. “It is the total return from a portfolio that must generate sufficient income. That would include dividends, interest and realized gains,” he says. “We rebalance the portfolio back to the originally agreed upon asset allocation model each quarter when it becomes out of line. This allows for cash to be freed from all three sources to send the required monthly distributions for living.”
Interestingly enough, many of those who saw generating a reliable income stream as their clients’ biggest threat said this problem is most acute among clients who have done well enough in saving for retirement that they can retire early without having to reduce their living standard. That’s partly because these clients aren’t eligible for Social Security yet and will be forced to pay penalties to access their qualified plan assets before they reach 59½. Many of these clients also have concerns about supporting their adult children and other family members, according to the advisors surveyed.
“The basic reality for the clients is they are no longer earning money, so the investments are no longer in accumulation phase and are in the living money phase,” Avalos explains. He says he always cautions that health issues are much bigger than a market crash. “I always tell my clients one medical episode will ruin the best plans, so make sure you have proper health insurance and create a healthy lifestyle for yourself.”
Fragasso says his firm works ahead and leaves a certain level of money market cash so that the client has the comfort of not needing to raise cash in a down period in the inevitable cycles of the stock and bond markets.
“I constantly ask clients, ‘How much do you need to spend each year to survive and enjoy retirement?’” says Scot Hanson of EFS Advisors in Cambridge, Minn. He points out that if t
he withdrawal rate is more than 4% to 5%, then it is non-sustainable. “You are going to run out of money. How then do you plan to deal with it? Get another job? Or go broke and live on less in the future? It is up to clients to decide their own fate,” Hanson says.
Advisors are split when it comes to recommending portfolio withdrawal rates for their clients. Fully one-third say they advise between 3% and 4% in the first few years of retirement. Another 32% say they recommend for withdrawal a starting point of between 4% and 5% of their clients’ portfolio, adjusted annually for inflation. And 22% say they adjust the withdrawal rate every year, depending on several factors.
“The withdrawal depends on the client’s age,” Avalos says. “With some taking retirement before 70½ years old, the need to establish a rate that will not draw down the principal at a high rate is normally desired by most clients.