Mary Beth Franklin: 4 C’s a gem of a retirement income plan

If imitation is the sincerest form of flattery, the diamond industry should be all puffed up. Gary Bhojwani, chairman of Allianz Life Insurance Company, credits the industry’s ubiquitous 4 C’s guidelines for shopping for a gem based on clarity, color, cut and carat weight as the inspiration for a new framework for discussing retirement income strategies with clients.

“The diamond industry has done a remarkable job of taking a big-ticket item that is complex, intimidating and infrequently purchased and boiling it down to a simple formula,” Bhojwani told me in a recent phone interview. “Almost every adult can name at least one of them, and many of marrying age can recite all four. They have trained us well.”

Bhojwani challenged his marketing team to come up with a similar set of alliterative rules to help consumers figure out the important questions they need to ask as they transition to retirement. “We wanted to create a framework that is both product and company agnostic to help consumers have these important conversations with their advisers,” he said, although he admitted that Allianz has a vested interest in promoting annuities,

He offers the new 4 C’s of retirement income planning — Clarity, Comfort, Cost of Living and Certainty — as a way to structure the conversation around the client’s needs, wants and concerns.

Starting with “clarity,” the fact-gathering part of the process, the financial adviser can paint a picture of how accumulated assets can be used to create retirement income and how inflation, longevity and other risks could affect their plans. It’s an appropriate time to pose the basic questions such as how much income do you need? What sources of guaranteed income do you already have? What is your risk tolerance? How many years could you live in retirement? Do you want to leave anything to your heirs or charities?

With clarity achieved, individuals can focus on “comfort” — what they will want and need in retirement. Projecting retirement expenses, and then deducting guaranteed sources of income such as Social Security, pension or annuity income, an adviser can identify the consumption gap (or surplus). Contrary to popular assumptions that expenses decrease by about 20% in retirement, a 2008 consumer survey of retirees found that costs dropped only slightly for most economic groups and actually increased for wealthier retirees
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“Cost of living,” the third of the 4C’s, gauges the impact of inflation on retirees’ savings and potential solutions for preserving future purchasing power.

And finally, “certainty,” the last of the 4 C’s, lays out the realities of longevity and market volatility. People are living longer than ever before, so the length of time spent in retirement will be considerably longer than many baby boomers are prepared to fund. And unlike investors in the accumulation phase who have more time to weather volatile markets, a bear market during a retiree’s initial drawdown years can decimate a nest egg. Advisers can use annuities to combat risks of longevity and market volatility.

As more baby boomers transition to retirement, the need for income planning will increase. Unlike a diamond, retirement isn’t forever, but it could last a very long time. Millions of Americans need help figuring out how to make it work. The new 4 C’s could be a good place to start. Check it out for yourself or your clients at http://www.allianzlife.com>Allianz Life.