A new way to look at retirement income planning

Bucketed investing gives retirees an intuitive understanding of their finances, but administering this approach can be time-consuming for advisers

Apr 22, 2019 @ 10:55 am

By Natalie Wolfsen

Retirement income is a major concern among upcoming retirees, with 46% of Americans predicting they won't have enough money once they leave the workforce. Compounding these fears, 10,000 baby boomers retire every day.

This translates to the reality that an increasing proportion of our society may struggle to meet their financial needs, particularly since Social Security only covers 40% of an individual's average earnings.

Financial advisers are in a unique position to help deal with this alarming lack of preparedness among upcoming retirees. However, current retirement planning approaches are typically time-consuming and resource-intensive, requiring advisers to manually administer and rebalance investor cash flows. Given the demographically driven demand for retirement planning, advisers need simple, intuitive tools that position them to meet the financial needs and goals of their clients. We need to look beyond the status quo to envision what a more effective retirement planning approach could look like.

(More: Richard Thaler wants to use 401(k)s to boost Social Security payments)

Tap into investor and adviser psychology

When considering how to turn clients' nest eggs into steady income replacement strategies, as well as how to explain decisions and convey progress to clients, it's important to leverage adviser and investor psychology.

Bucketed investing is one approach that provides an intuitive way for advisers to think about investing and for investors to gain a comprehensive understanding of their finances. A bucketed investing framework allows advisers to manage their clients' money within different time horizons. In doing so, they can demonstrate to investors the importance of having the security of a short-term liquidity bucket, while also allowing clients' savings to keep growing through longer-term investment buckets.

While the bucketing approach is intuitive, administration can be laborious and time-consuming. For instance, if clients tell an adviser they're buying a new car, the adviser has to adjust the buckets manually. Multiply this by hundreds of clients and this simple task can become overwhelming! Thankfully, there are tools available that can automatically rebalance buckets, allowing advisers to harness the potential of this investment framework, so they can focus their time and resources on keeping up with investor demands, while scaling their businesses.

(More: Drawing down assets from a portfolio need not be tough)

The power of visualization

Along with tapping into the psychology of investing, being able to visually demonstrate to investors where their money is going and how it's progressing toward their goals is crucial for instilling confidence. Visual tools are an underutilized yet intuitive solution for enhancing the investor experience.

Digital calculators, for example, can automatically generate bucketed suggestions based on client information to enable advisers to expedite client money management while providing a way for investors to understand how their finances are distributed across various buckets. These kinds of solutions that support a goals-based approach to investing are crucial in helping advisers keep investors fully aware of and reassured about their retirement income strategy.

Ensure liquidity, flexibility go hand-in-hand

Historically, annuities have seen high demand from retirees looking for the security of an income stream. But annuities are far from perfect given their often high fees, lower liquidity and devaluation from inflation.

Having access to income is important for retirees and something that should be accounted for in any retirement income strategy. However, annuities don't have to be the only solution. A bucketing approach is inheritable, flexible, liquid and cost-effective. It allows access to funds immediately if needed and provides protection against market swings and unexpected life events. It's designed to ensure retirees have a source of income replacement while leveraging market upswings to continue growing their nest eggs. As with other investments, a bucketing strategy is subject to changes in market value.

Investors' retirement planning fears underscore the disconnect between current retirement planning solutions and what investors need.

By tapping into solutions that harness automation and are visual, goal-oriented and flexible, advisers are better-positioned to help the growing pool of retired baby boomers meet their financial goals, while simultaneously reaping the benefits of improved efficiencies to scale their businesses.

Natalie Wolfsen is chief solutions officer at AssetMark Inc., an investment adviser.


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