Income emerges as a top priority

The disturbing prospect of clients' outliving their retirement income continues to loom large on the advisory landscape.

The disturbing prospect of clients’ outliving their retirement income continues to loom large on the advisory landscape. It’s an issue where every adviser is well-positioned to lend a hand.

The primacy of the retirement income issue — and just how strongly advisers want to address it — were borne out when we surveyed 500 advisers and 500 investors (both advised and unadvised) this year to learn more about the tenor of today’s “advisory conversation.” The research, the first in a planned series of biannual adviser/investor polls, also offers fresh evidence that an advisory focus on retirement income is well-directed.

The population in need of retirement income planning is large and growing. In 2020, there will be 100 million Americans 55 and older, according to the U.S. Census. Yet many will be woefully ill-equipped for retirement; fewer than half of the 425 investors at or near retirement age whom we polled said they’re “very prepared” to address their income needs.

Retirement income emerged as an overriding issue in our poll, which examined investor and adviser attitudes across a broad spectrum of financial and investment concerns. “Maintaining income that meets your needs” topped the list when we asked retirement-age investors what retirement topics they most want to learn about in 2010 (cited by 44%). Closely following was “not outliving your assets” (37%).

Concern about retirement income is wrapped in overarching investor worries about generating more yield from investments in the wake of the crash of “08-’09. Yield is one of the top issues that advisers are dealing with, and eight in 10 report getting questions on the topic from clients.

As one adviser put it: “Fewer people are chasing after monster returns. More are concerned with having enough guaranteed income.” Another said, “I am focusing on income planning — that is the piece that most people fail to do as they accumulate assets.”

Advisers recognize both the need and the opportunity involved in income planning. They say that helping to maintain income is one of the top three retirement-related issues they would like to learn more about in 2010, along with managing health care costs and making decisions about Medicare.

The “magic bullet” for retirement income remains elusive. But advisers can make a difference with diligent asset planning and smart use of some readily available tools.

Start strengthening the income component now: In the wake of the financial crisis, many investors have been over-reliant on Treasuries, positioning their portfolios in a way that may be much too conservative and ill-suited to the rising-rate environment we foresee for the longer term. Advisers can make the income-generating portion of a portfolio more robust by considering high-quality “spread sectors” — bonds trading with yield spreads over Treasuries’ — a genre that we believe should perform well as rates inch upward.

Take a deeper look at Social Security: The Social Security Administration estimates that it soon will be receiving 16,000 new benefits applications a day. Almost three-quarters of individuals take early withdrawals with reduced benefits. In our view, that’s perhaps not the best tactic. Especially when advising a married couple, advisers should examine the outcomes of several possible Social Security scenarios, considering such variables as when benefits are first taken, which spouse takes benefits first, the role of spousal benefits, the potential impact of divorce and the implications of longevity — among others. Your careful examination of such scenarios and the associated results can help a client create a strategy that effectively maximizes the lifetime value of Social Security benefits.

Closely match withdrawal methods to needs: Advisers traditionally help clients plan a retirement income stream based on a withdrawal of a fixed dollar amount and an anticipated asset growth rate. But applying one withdrawal method for all retirement income needs disregards the varied nature of those needs, especially the discretionary portion. Income for discretionary spending may be more suitably obtained by taking fixed-percentage withdrawals that allow this spending to vary in a sensible way, increasing when markets are good and decreasing when they are not.

“Bucketing out” a retirement portfolio, by using different kinds of withdrawal methods, and assets matching different income needs, can go a long way toward ensuring the viability of a long-term income stream.

Frank M. Porcelli is managing director of U.S. retail at BlackRock Inc.

For archived columns, go to InvestmentNews.com/retirementwatch.