When people climb Mount Everest, their goal is to reach the summit. However, descending the mountain is the riskiest part, and people often forget about the importance of the journey back down. Just like descending Mount Everest, the biggest risks in financial planning come from spending down assets, not accumulating them.
To familiarize clients with the ins and outs of retirement planning, regardless of where they are in their journey, we help them first understand how factors like lifestyle, distribution strategies and their unique vision for their future can contribute to their retirement plan outcomes. With a few key considerations, individuals can start planning for a retirement that aligns their wealth with their values.
Aligning Portfolio Management Goals Is Key
Retirement planning is often discussed in one-size-fits-all terms, with portfolio recommendations that are not connected to the client’s individual circumstances.
The typical advice of becoming more conservative with money before retirement may not apply to someone whose primary focus is multigenerational wealth, whereas a client with significant assets and no legacy goals may prefer to be far more conservative than a typical retiree. Portfolio allocations should be dictated by a financial plan that reflects the specific desires of the client, rather than starting with a predetermined allocation and trying to reverse engineer a retirement lifestyle to match it, as is often the case.
Retirement Distribution Strategies
Retirement is more than a portfolio. It is not enough to just have assets; clients need a game plan to make sure the assets last and can access them efficiently.
Inflation is the enemy of the retiree, eroding purchasing power and eating into real portfolio returns. Bonds, particularly in the current interest rate environment, are often insufficient, with equities presenting the most effective way to combat inflation headwinds. The challenge is that equities also introduce significant unpredictability. Part of a good distribution strategy is ensuring that a client has sufficient liquidity in stable assets to ride out inevitable market downturns. You never want to be in a position where you have to sell good assets at depressed prices.
The necessary liquidity can be achieved with cash, bonds, or life insurance cash values. Cash is the easiest, but it is heavily taxed and generally has negative real returns (gross returns minus inflation). Bonds offer more upside, but interest rate and credit risk can result in negative returns, negating some of the liquidity advantage. In addition to its death benefit protection, life insurance cash values generally grow tax deferred, may have higher yields than cash and can come with policy guarantees that they can never go down, but generally require purchasing a policy a decade or more in advance. They are a good example of why retirement planning needs to begin well before retirement.
Like inflation, longevity presents substantial challenges clients entering retirement. The combination of increased life expectancy and the transition away from company-sponsored pensions creates a perfect storm of risk for today’s retirees. To combat this, income annuities, like a pension, provide a means of income to help limit the risk of clients outliving their retirement savings. Income annuities either can begin immediately or after a designated period. Much has been made of the low interest rate environment having a negative impact on annuity payout rates, but the logical annuity alternative, bonds, is suffering from those same effects.
It often can be challenging for clients to part with a portion of their capital, but doing so reduces not only how much they need to access from the remaining portfolio each year to fund lifestyle, helping to mitigate market risk, but provides peace of mind that no matter what there will always be income similar to a paycheck coming in the door. That said, clients generally should not annuitize their entire portfolio to avoid having no liquid assets for unexpected emergencies.
Much like a wedding is only the start of a marriage, the retirement date is just a small piece in the long-time horizon of retirement. Today’s retirees will often experience 30-40 years of retirement, and there are bound to be changes along the way.
Lifestyle factors such as occupation, location, goals and health, all contribute to strategizing clients’ financial plans for retirement and will be ever evolving. Helping clients connect their pre-retirement lifestyle to their vision for retirement can avoid surprise disappointments, such as not traveling as much as they might have anticipated.
If relocation is in their retirement plan, encouraging clients to research the area with thoughtful consideration and decision making will help create a positive outcome, both financially and mentally. Think through how factors such as state taxes, insurance, and cost of living might impact overall finances, and adjust the financial plan accordingly.
The first step to achieving financial peace of mind for retirees is open communication between the client and the client’s partner or family, especially if their spouse may not be retiring at the same time. The best way to ensure a positive overall transition is to openly communicate roles and responsibilities, and then outline the client’s vision and goals. These goals can range from traveling, working a part-time job or starting a new career.
Factors leading to the overall improvement of happiness in retirement should also be considered. These include the community to retire in, whether it has enjoyable activities and a pleasant social environment, and its proximity to children and grandchildren. These factors often matter more than which stock, bond or fund to buy. Physical and mental health – and their associated cost – are also integral in a holistic planning strategy. Even having guaranteed income, whether through a pension or an annuity, can be associated with greater retirement happiness.
As financial advisors, we want to help clients create plans that provide a road map for a successful retirement, whatever that means to them. Good planning is both strategic and empathetic, helping clients achieve their goals and have peace of mind along the way.
Edward Moyzes is a financial advisor with Northwestern Mutual and CEO/founder of Strategic View Advisors, a member of the Northwestern Mutual Private Client Group. He may be contacted at firstname.lastname@example.org.
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