10 Issues To Discuss
For people with $2 million or less saved, advisors can help them specifically work through 10 questions to understand whether they have financial freedom in later years:
The 10 issues are:
1. When and how will a client retire?
2. When should the client start Social Security?
3. How can the client use savings to build a retirement income portfolio?
4. What Medicare choice should the client make?
5. Does the client need to reduce living expenses, and how?
6. Should the client deploy home equity to generate income?
7. How can the client protect against long-term-care expenses?
8. How can clients protect themselves against financial fraud?
9. How can a spouse be protected when the client is gone?
10. Does the client want to plan for a financial legacy?
Only one of those issues, No. 3, involves investing, Vernon pointed out.
In discussing these issues with clients, an advisor can play a big role in framing how they can achieve retirement security. Vernon said clients tend to fall into two groups: the ones who hoard money and are extremely worried about outliving their savings, and the ones who think their savings are a checking account, spend it too fast and have no plan.
“This is a golden opportunity for planners to help clients assess which camp they fall into and help lead them to a middle ground,” Vernon maintained.
He added that advisors can look to modern portfolio theory for ideas on how to talk with clients about having enough income to exceed their expenses. “I think you can use the same language, concepts and analytical tools for spending money in retirement. When accumulating money, you talk about asset classes, and now we’re going to talk about retirement income classes. When accumulating money, the decision is the asset allocation decision, and now you’re going to talk about the retirement income allocation decision. When you are accumulating, you look at how much you’re accumulating, and now you’re going to look at how much income you are generating. Finally, an investment loss is losing value in your savings, where now you want to focus on losing retirement income.”
A Recommended Withdrawal Strategy
The Stanford Center on Longevity evaluated 292 strategies on generating retirement income, and the “Spend Safely In Retirement” strategy is one that it believes can work well for most clients with $2 million in savings or less, Vernon said.
For clients using this strategy to build a retirement income portfolio, Vernon says, the longevity center suggests three things:
* Retirement paychecks. These are guaranteed to last the rest of your life, no matter how long you live, and they don’t go down in stock market crashes. Use these to cover your basic living expenses, food, a roof over your head, medical premiums, utilities.
* Retirement bonuses. These typically come from invested assets or salaries from working. Use these to cover your discretionary living expenses, like travel, hobbies and gifts for grandchildren.
* Cash stash. This money covers emergencies so you don’t have to dip into your savings.
Vernon noted these concepts are familiar to many advisors, but they use language that individuals are familiar with from their working days.
The advisor’s goal is to construct a portfolio that safely meets clients’ needs.
Retirement paychecks can come from Social Security, a traditional monthly pension, a low-cost annuity or a reverse mortgage. Retirement bonuses can come from systematic withdrawal plans, including the IRS’s required minimum distributions from retirement accounts; interest and dividends from savings, working or self employment, and rental real estate.
Help clients optimize Social Security through a thoughtful delay strategy, Vernon said; that is going to work for most people. “A lot of people say, ‘But Social Security isn’t enough.’ That may be true, but it doesn’t mean you dismiss Social Security. It’s still pretty good and you get most out of that,” he said.
Step 2, he said, is to invest in a target-date, balanced or stock index fund and use the required minimum distributions to determine the annual withdrawal. “This is a baseline strategy. … [The clients] may want to refine this with different withdrawal strategies. But at least this is a baseline that works fairly well,” he said.