Match retirement cash flow with clients' long-term goals

Match retirement cash flow with clients' long-term goals
Don't assume that clients intend to spend their principal in retirement.
JUN 29, 2022

Retirement income continues to be a key focus for retirement savers, and while most retirement planning software defaults to the assumption that retirees would be fine with consuming their principal to fund their retirement, this may come as a surprise to many clients, who instead plan to rely only on income generated from their portfolio. In fact, recent J.P. Morgan research revealed that nearly 7 out of 10 individuals are concerned about outliving their money in retirement.

For this reason, it’s critical that advisers ensure their clients understand the various retirement income options available, including the various pros and cons:

  • Total return: Where investment returns exceed spending. This approach allows for a bigger legacy and is easier for those with a pension and low expenses relative to the amount they have invested. It may be unattainable for others.
  • Preserve principal: Where individuals spend only the investment return. This can help give peace of mind and curtail overspending. Principal is usually subject to a decline in value, which may be overlooked by clients, and it can be risky if there's a stretch for yield and lifestyle may be unnecessarily constrained.
  • Spend principal: Consuming earnings and a portion of principal. This approach is less reliant on income-generating investments and may allow for higher spending, resulting in nervousness when there's market volatility.

Once clients are aware of the various approaches, and what may be best suited to their circumstances, settling on the most appropriate strategy to help them achieve a secure retirement should be a priority.

Ideas for clients who are concerned about market risk or are reliant on principal withdrawals include:

  • Creating a long-term care plan. Almost all clients will benefit from this, and it's more critical if there may be few assets left toward the end of their life.
  • Setting up a dynamic withdrawal strategy. This might include not taking as much of a “raise” for inflation or deferring a big optional purchase, such as a new car, after a market decline. Conversely, the year after the market goes up, spending may be increased a little. Agreement on the rules up-front can avoid negative surprises.
  • Considering an annuity. If clients have difficulty sorting out what's a discretionary expense, a simple approach may be to use an annuity for stable expenses and rely on other investments for variable costs, as outlined in the 2022 Guide to Retirement.

By laying out the pros and cons associated with various retirement income approaches, advisers can effectively guide clients on the appropriate strategy to meet their retirement objectives. There's no right or wrong answer here — just an informed decision that should be tailored to ease the way for nervous clients, regardless of their retirement income source.

Sharon Carson is a retirement strategist at J.P. Morgan Asset Management.

.

Latest News

Bipartisan bill aims to take down 401(k) charitable giving hurdle
Bipartisan bill aims to take down 401(k) charitable giving hurdle

The Charity Parity Act would eliminate a costly IRA rollover requirement that blocks direct charitable transfers from workplace retirement plans.

Trump drops $10 billion IRS lawsuit as $1.7B settlement fund takes shape
Trump drops $10 billion IRS lawsuit as $1.7B settlement fund takes shape

A last-minute court filing ends a case against the federal tax-collecting agency that had drawn unprecedented conflict-of-interest questions from Democratic critics.

You Can’t Spell Advisor without AI
You Can’t Spell Advisor without AI

Advisors discuss their use of AI now and how it will change going forward

DOJ's fraud sweep bags over $1B in convictions, guilty pleas and indictments in a single week
DOJ's fraud sweep bags over $1B in convictions, guilty pleas and indictments in a single week

Medicare scam, pandemic benefit theft, offshore tax evasion — federal prosecutors are casting a wide net.

Retirement without guaranteed income streams may mean near-total asset wipeout
Retirement without guaranteed income streams may mean near-total asset wipeout

Report finds that pension income acts as a financial lifeline for retirees facing late-life shocks and raises urgent questions about the DC-only future.

SPONSORED Beyond wealth management: Why the future of advice is becoming more human

As technical expertise becomes increasingly commoditized, advisors who can integrate strategy, relationships, and specialized expertise into a cohesive client experience will define the next era of wealth management

SPONSORED Durability over scale: What actually defines a great advisory firm

Growth may get the headlines, but in my experience, longevity is earned through structure, culture, and discipline