If there is one lesson to be drawn from the recent InvestmentNews Retirement Income Summit, it is that the planning conducted by advisers to provide clients with income in retirement is more complicated, nuanced and critical than ever.
New research findings and the market experience of the past few years have upended many of the assumptions made, and certainties deemed, by advisers and clients alike.
The widely accepted 4% withdrawal rule, for example, has been modified, reinterpreted and recalculated. The result: A 3% to 6% withdrawal range guideline — not a rule — that depends on factors including a client's risk tolerance, willingness to adjust consumption, portfolio construction, health, longevity assumptions and legacy preferences.
Every item on the retirement income statement, whether on the revenue or expense side, now seems to be in flux.
While the bulwark of retirement income for most Americans — their Social Security benefit check — won't disappear in the foreseeable future, the program's eroding financial footing will affect everyone. As contributing editor Mary Beth Franklin pointed out at the summit, today's preretirees in their 50s and 60s are likely to see the value of their monthly retirement check eroded by higher taxes and changes in benefit calculations.
The other main source of retirement income, investment returns, also is surrounded by an increasing number of question marks. Volatility and economic worries have shaken many investors' confidence in the equity markets, while interest rates remain stubbornly mired at razor-thin levels that would have seemed unimaginable in the past. For retirees and their advisers, this means that delivering capital gains, and dividend and interest income now requires greater effort and entails greater risk.
Equally nuanced and complex is the thinking now required to calculate retirement expenses.
Budgeting for food, shelter and clothing probably still can be done on the back of an envelope, but not so for taxes and health care. For those dependent on accumulated savings, changes in these huge, imponderable expense categories can have a devastating impact on overall wealth and lifetime income.
Adviser-client discussions about tax planning at least are being conducted. But in many cases, advisers are loath to broach health and long-term-care issues out of insecurity concerning the subject matter, and the belief that clients are emotionally unready to discuss the consequences of health-related problems. As elder-law expert Harley Gordon explained to attendees: “Long-term care is what happens to someone else.”
With certainty — or at least the illusion of certainty — no longer present in retirement income planning, financial advisers have become even more important in the lives of their clients. Advisers now must listen intently to clients' fears, analyze what typically is a more complex financial picture than in the past and then explain a variety of scenarios, investment alternatives and trade-offs to help clients reach their goals — often in the face of unrealistic expectations and irrational behavior.
Advisers at the summit were eager to ask questions and share information concerning retirement income issues, including those that involved Social Security, long-term care, taxes, individual retirement accounts or withdrawal strategies.
Attendees are to be commended for seeking solutions at a time when providing a path to retirement income has never been more challenging. It is also a time when such solutions never have been more necessary.