“Setting the client’s expectations is 80 percent of the battle,” says an advisor in Ohio with more than 20 years of experience, who asked not to be quoted by name. Between 80 percent and 90 percent of his retired clients are spending in line with their portfolios.
If an advisor knows the client well, she usually gets some warning that the client is spending too much even before retirement, says Kathleen Kee of Confluence Wealth Management LLC in Portland, Ore. More than 90 percent of her clients are spending appropriately.
“If you have worked with someone for a number of years, you know ahead of time it is going to be an issue that you have to work on,” says Kee. Solutions that can help solve the overspending problem include having the client work longer before retiring to build up more of a nest egg, or having them work part time in retirement. Clients can also do a little belt tightening. “It’s a combination of these three things.”
How much the retiree can spend depends on the withdrawal rate from the portfolio, and most advisors set that rate conservatively, but many adjust the amount each year. The largest group of advisors, 44 percent, set a withdrawal rate for their retiree clients of between 4 percent and 5 percent of their portfolio adjusted for inflation.
The next largest group, 38 percent, adjusts the withdrawal rate each year, depending on the individual’s circumstances. Almost 16 percent set the rate based on other factors, and only 38 of the 1,766 advisors surveyed (2.2 percent) have clients withdrawing more than 5 percent of their portfolio value a year.
Most of the Ohio advisor’s clients are withdrawing 3.5 percent to 4 percent, unless they retire at a young age, which could make the withdrawal rate even lower.
“So much depends on what happens in the first two or three years of retirement. If the portfolio starts to lose value, the client needs to be prepared to make adjustments,” he says.
Courtney L. Livingston, financial associate with Thrivent Financial in Watertown, S.D., adjusts the withdrawal rate each year, depending on how the client’s family is changing and what their risk tolerance is at that point. He makes those judgments by meeting regularly with clients.
Alexander, the Oklahoma City advisor, says a 4 percent withdrawal rate works for most of her clients except for those who retire early and need a more conservative rate to make the money last.
“When I got into this business 14 years ago, the average withdrawal rate was 6 percent, but that has changed for most people,” she says. Her clients have a wide range of investable assets from $500,000 to $10 million.