Retirement income theories focus on meeting lifestyle goals or needs

Pfau explains two strategies that depend on flexibility of the client

Oct 9, 2013 @ 3:09 pm

By Liz Skinner

retirement income
+ Zoom

The approach an adviser takes in constructing a retirement portfolio depends on whether the client is content living their early years of retirement modestly or wants to enjoy these days to the fullest, potentially having to cut back in later years, a well-known retirement scholar said.

The probability-based school of thought would allow for a certain annual withdrawal rate to accommodate the client's lifestyle spending, said Wade Pfau, professor of retirement income at The American College of Financial Services, speaking at the National Association of Personal Financial Advisors' national conference in Philadelphia on Wednesday.

The potential pitfall, however, is that the client could run out of money and then have to live off Social Security, he said.

Taking the safety-first approach, on the other hand, would have client funds invested according to whether they must be used for basic needs, emergencies, discretionary spending or legacy goals. For example, 75% of a portfolio may be used to fund an annuity or Treasury inflation-protected securities ladder that pays an income that covers needs, leaving only 25% of assets to be invested to cover the cost of life's enjoyable extras, Mr. Pfau said.

"This approach eliminates the upside, but it helps to eliminate the downside, too," he said.

Advisers can decide the right approach for clients by asking them about their budget and seeing how they react to suggestions of cutting back on certain lifestyle costs, such as their country club membership, Mr. Pfau said.

They also should take an approach that allows for periodic changes, taking into account that some research suggests that discretionary spending declines in the older years. Of course, health care costs are the potential deal breaker with that theory, he said.

An adviser subscribing to the probability approach could stave off disaster in declining markets by convincing clients to make some small cuts and adjustments every few years so that at least most of the client's lifestyle standards can be upheld and still have assets last through retirement, he said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Stephanie Bogan: How financial advisers can achieve more by reframing their realities

By revaluating the choices they make and the outcomes that result from them, financial advisers can make sure they're properly serving those most important to them — their clients, according to Stephanie Bogan, founder of Educe Inc.

Latest news & opinion

Fidelity taps Goldman Sachs to expand lending services through RIAs

Streamlined non-purpose loans use investment portfolios as collateral.

Jay Clayton says SEC, DOL can give market 'clarity' on fiduciary rule

Chief regulator is confident two agencies could reach 'common ground' on an investment advice standard across all accounts.

Vanguard winning at bond inflows, too

But iShares is strong competition.

Sen. Gary Peters brings broker background to work every day on Capitol Hill

Michigan Democrat resists ripping up DOL fiduciary rule but would be open to some changes.

DOL fiduciary rule causing DC-plan record keepers to change business with insurance agents

Principal has communicated that independent agents must change their business models to keep receiving compensation.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print