Mary Beth Franklin: Change the conversation about retirement planning

Every financial adviser knows that one of the best ways to minimize investment risk is to diversify among…

Every financial adviser knows that one of the best ways to minimize investment risk is to diversify among asset classes. And there is general agreement that the key to successful retirement planning is to start early and save as much as you can for as long as you can.

But when it comes to retirement income planning, no silver bullet or one-size-fits-all approach exists.

The risks retirees face go well beyond market volatility. They also need to be concerned with the impact of low interest rates on their savings, the risk of outliving their money, and health care and long-term-care costs that could disrupt their plans.

DIFFERENT SITUATIONS

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In addition, retirees’ situations are different. Their health, finances, access to pensions or Social Security, ability or desire to keep working, and family obligations — both during their lifetime and after they are gone — will determine their retirement needs and sources of income.

Consequently, there is an evolving realization that retirement income planning is very different from saving for retirement. The financial services industry is scrambling to create new models to help advisers design appropriate plans for their clients’ unique circumstances.

“Most investment professionals specialize in managing client assets with an eye toward maximizing accumulation during the clients’ working lives,” according to the latest edition of the Retirement Income Industry Association’s textbook for advisers studying for the group’s retirement management analyst designation.

I attended a recent RIIA board meeting in Washington where the principals discussed their philosophy, outlined the RMA curriculum and unveiled its new manual for compliance officers. The meeting was focused on introducing a few federal regulators to the changing needs of consumers and advisers as the baby boomers age into retirement at the rate of 10,000 people per day.

Retirement income professionals have a bigger challenge than most investment managers, said Francois Gadenne, chairman and executive director of RIIA. They need to manage their clients’ assets, liabilities and cash flow with an eye toward minimizing a broad range of risks during retirement, he said.

The RMA curriculum aims to teach advisers how to build a floor of sufficient income through guaranteed or low-risk sources while creating the potential for growth through exposure to riskier asset classes.

It is similar to the “lifestyle-driven investing” concept that Erin Botsford, founder and chief executive of The Botsford Group, outlined in her book, “The Big Retirement Risk: Running Out of Money Before You Run Out of Time” (Greenleaf Book Group Press, 2012). She divides retirement expenses into four categories — needs, wants, likes and wishes — and matches them with appropriate investments.

Ameriprise Financial Inc. is the latest investment firm to develop a new script for its workforce of nearly 10,000 advisers to help them launch a conversation with pre-retiree clients.

“As the population moves from accumulation to distributions, they are looking for a retirement income specialist rather than a broker,” said Craig Brimhall, vice president of retirement for Ameriprise.

The firm recently unveiled its new “confident retirement” approach and paired it with a tool available for iPads and other tablets so advisers can take the technology with them wherever they go. The portable tool and the refined talking points could revolutionize how advisers gather financial and personal information from their clients, allowing them to deliver a retirement income plan during an initial conversation.

“Retirement living is about cash flow, but it’s also about being ready for the unexpected,” Mr. Brimhall said. “Many other firms focus on cash flow but not about the things that can go wrong.”

Mr. Brimhall noted that the Employee Benefit Research Institute’s annual Retirement Confidence Survey consistently has found that a large percentage of retirees — 47% in the 2013 survey — retired before they had planned, often due to circumstances beyond their control, such as layoffs, poor health or caregiving responsibilities.

“We think those unanticipated events deserve more attention, so it’s built into the tool,” he said.

Ameriprise’s confident-retirement approach concentrates on four fundamental areas that advisers can address: covering essentials, ensuring a lifestyle, preparing for the unexpected and leaving a legacy.

The foundation of the retirement strategy is to cover all essential expenses that are considered predictable and recurring, such as food, housing, utilities, taxes and medical expenses, with guaranteed or stable income. That might include Social Security or pension benefits, as well as annuities or certificates of deposit.

Once essential expenses are covered, advisers can work with clients to identify additional goals, such as travel or hobbies, and identify appropriate sources of income to fund these optional expenses. Typical solutions would focus on a strategic allocation for cash, as well as investments designed for income and growth.

Unexpected risks can devastate retirement plans, so the third step in the strategy includes insurance solutions to deal with medical and long-term-care expenses, personal-liability exposure and providing adequate protection for a surviving spouse.

After accounting for essential, lifestyle and unexpected expenses, the final step is to create a legacy plan for any remaining assets.