Creating time-tested retirement income plans

Two veteran advisers reflect on more than 35 years of managing retirees' assets and expectations

I usually set aside Labor Day for reflection, not just about the official end of summer, but about broader topics that I encounter as a columnist for InvestmentNews. So I was thrilled when two veteran financial advisers I admire — Phil Lubinski and Paul Reasoner — agreed to share the wisdom they’ve gained from working with hundreds of clients over the past 35 years to create and manage retirement income plans that have stood the test of time.

With millions of baby boomers moving into retirement with trillions of dollars of assets that need to be converted into income, the opportunity has never been bigger for the financial services industry. But this opportunity presents its own challenges.

“Clearly the most significant problem facing both clients and advisers is the lack of certainty of the distribution strategy of an income portfolio,” said Mr. Reasoner, founder of Compass Wealth Advisor in Elkhart, Ind. , and creator of the Tiered Retirement Income System, which he has used for his clients and his personal assets since 2004. In 2014, when he was 70, Mr. Reasoner sold his practice to a transition partner.

“Many advisers simply rely on accumulation strategies and hope that they work for income portfolios,” he said. But the painful bear markets of 2000-2002 and 2007-2009 “should have taught us that strategies used to accumulate long-term wealth cannot be automatically transferred to apply to distribution strategies.”

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Mr. Reason uses a time-segmentation strategy, breaking income portfolios into three tiers based on their function.

The first tier, income insurance, holds liquid and guaranteed assets, such as money-market funds and CDs, that entail no risk of principal loss, for a short period of time, up to five years. The second tier is dedicated to income production through assets such as bonds, preferred stocks, high-dividend stocks or fixed annuities, which provide relatively high certainty of consistent income and principal conservation over longer time horizons. The third tier is allocated to growth investments, balancing risk of capital with potentially higher returns.

“While no one can structure a retirement income portfolio which uses equities as a driving component that will not experience down years, there are techniques which may mitigate both the real and psychological damage done by negative volatility,” Mr. Reasoner said. “Getting clients to focus on the cash income from their portfolio and having a strategy in place which anticipates negative volatility and assures the client several years of targeted cash flow will usually allow the portfolio to recover and grow in the future by not being forced to sell the golden goose which produces the egg.”

Mr. Lubinski, co-founder and head of retirement income strategy for WealthConductor, has been developing income distribution software tools since the 1990s based on more than three decades of experience with the clients of his Denver-based wealth advisory firm. IncomeConductor is a cloud-based software program designed for advisers seeking to build and manage holistic, time-segmented income plans for their clients.

“Having worked with retirees for the past 35 years, I have come to appreciate what their needs are during their journey through the different phases of retirement,” Mr. Lubinski said.

“Retirees will become much more dependent on their advisers as they age and begin to have diminished financial acumen,” he said. “The advisers’ value proposition to their clients must transition from asset manager to plan manager.”

Mr. Lubinski recently published a white paper, Meeting Retirees’ Expectations: Providing Effective Retirement Income Advisory Services, about the issues and situations retirees encounter and guidance for advisers on how to best meet their expectations.

While Mr. Lubinski stresses the importance of creating retirement income plans covering short-, intermediate- and long-term needs, he warns about the dangers of being too precise. “To predict the exact spending needs of retirees over long period of time is an exercise in futility. At best, we are creating a blurry baseline that provides us a guideline to measure future changes against.”

“The segmented or bucket strategy that I first developed in 1984 turned out to not only be intuitive to my retiring clients but much easier to modify along the way as their journey played out,” he added.

When Mr. Lubinski retired in 2014, he received about 200 notes from his clients thanking him for giving them to permission to retire and permission to spend their money, for helping them think through difficult decisions and for bringing a transition partner into his practice.

“Not a single client thanked me for creating a meticulously detailed initial analysis, nor for creative a bulletproof tax strategy, nor for my scrutiny of investment products,” he said. “Despite this feedback, I still see so many advisers focusing on the wrong things.”