Showing how good or bad luck shapes retirement lifestyles

A new retirement-income planning service aims to help financial advisors show clients how good luck or investment misfortune could affect their lifestyles in retirement.

That, the founders of IncomePath say, will help people make their own decisions about retirement spending and how much of their wealth to put into annuities or other products.

The subscription-based software is designed to complement other planning resources advisors have, and it will help illustrate how the different choices clients make could affect their spending habits early and later in retirement.

“There is a ton of room for the advisor to return to the existing platforms for fine-tuning,” said Tamiko Toland, CEO of IncomePath and former head of lifetime income strategy and market intelligence at TIAA. “Right now, those solutions don’t offer a way for people to understand how much annuity you want or how much retirement income makes sense. It’s a complaint we’ve heard and had ourselves for many years.”

Toland, who has a background in annuity research, built the new service with co-founder and chief strategist Michael Finke, professor of wealth management at The American College of Financial Services.

The service gives a visual for different scenarios and aims to move beyond the failure-rate methodology commonly used with the 4% rule, Finke said. Telling a client that their retirement income plan has a 15% chance of failure, for example, isn’t particularly helpful, not only because it’s unclear what “failure” means, but more so because people can simply adjust their spending in retirement, he noted.

Seeing the different “income path” options – including those based on better or worse financial returns – will help advisors guide clients in high-level decisions, he said.

“You have to acknowledge the reality that markets may not do as well as you had hoped,” Finke said.

The approach was inspired by economist William Sharpe’s idea to make simulations of how complex products like annuities performed under different market conditions, showing how those affected lucky or unlucky retirees’ lifestyles. While better performance meant lucky retirees had higher, smoother income profiles, the unlucky ones ended up unpredictable, lower income, according to a paper Finke and Toland issued along with their announcement.

Initially, IncomePath will not include specific product information or guidance, but the company is talking with annuity providers and distributors, Toland said.

However, advisors will be able to include inputs, such as details of guaranteed lifetime withdrawal benefits, that would show clients the effects that such products could have on their retirement income scenarios.

“We’re taking a very agile approach to development. We understand we will need to customize for different clients and the systems they have,” Toland said.