Flexibility key to retirement planning

Ever since William Bengen's article about retirement withdrawal rates was published in 1994, his 4% “safe” rate has been analyzed from different perspectives with dissimilar conclusions. Depending on the assumptions, a safe withdrawal rate could fall anywhere from 2% to 5%. Carried to the extreme, one could argue that the “safest” withdrawal rate is zero. Safe withdrawal rates are a hot topic these days. I maintain that rather than using a single rate, financial advisers should implement a more realistic approach that is flexible and changes with market conditions, as well as the lifestyle and goals of the client. This approach entails addressing a series of questions upfront, such as: What is the lifestyle price of safety? How big of a risk are we trying to avoid? What choices would we have, should we face such risks? Is the lifestyle price that comes with safety worth it? These questions often aren't asked. Two other important questions that advisers should ask of themselves are: Can I add continuing value to the planning process? Or is this just a “set it and forget it” approach, rendering my involvement in the planning essentially obsolete? I have heard from safe-withdrawal advocates who claim that their approach already contemplates changing the plan regularly. But is that what is implied by using the term “safe” in conjunction with a fixed percentage? Might some consumers or advisers think that safe also means stable?

CONTINUING COUNSEL

Many clients value continuing counsel on whether they can spend more, reduce risk, move goals sooner or increase the size of goals. In order for a flexible plan to be safe, it requires a process designed for regular adjustments, ruled by both ideal and acceptable goals, relative priorities and a constantly forward-looking funded status. (A client of ours enlisted Harris Interactive Inc. to do a study of retirement confidence which showed that this flexible method had almost twice the confidence of the Employee Benefit Research Institute's Retirement Confidence Survey.) Under this flexible process, if severe markets cause a significant decline in the confidence level of the plan, some clients — perhaps many — would rather receive continuing advice about their choices to move back toward comfort. Some expect advice that reflects what they value, and allows them to implement some minor adjustments to lower-valued goals to maintain or even increase higher-valued goals. A flexible and continuing planning process provides an alternative to a withdrawal rate rule. Its flexibility prepares both the adviser and client in advance, before the emotions from market gyrations cloud objectivity. The continuous, forward-looking monitoring and planning process allows advisers to counsel clients with new advice about the choices that they have so as to avoid being either overfunded (needless sacrifice) or underfunded (too uncertain), in essence, toward balanced comfort. A long-term advice relationship means that advisers need to connect deeply and emotionally to clients, and attain an intimate understanding of their hopes, dreams, aspirations and fears — but not just their fears. Such advisers break a client's retirement lifestyle into a series of individual goals such as grandkid trips, a new boat or a lathe for woodworking. We need to understand why clients have relative priorities among competing goals, such as how much one would compromise if it were necessary to buy more of a higher-priority goal or to get a goal sooner. We can't be prepared to deal with the capital markets' uncertainties, and how they affect a client's retirement, without knowing both a client's ideal and acceptable set of goals, and relative priorities among them. Aside from the markets' uncertainties, a client's goals and priorities are dynamic and forever changing. Unexpected things will happen in their lives just as they happen in the markets. Continuously adapting advice to the choices between ideal and acceptable goals, relative priorities among goals, over- or underfunded status of a plan and setting the expectation in advance that the plan will need to change has significant appeal to many clients. It also makes the adviser more valuable. Although setting a safe spending rate seems easy, I contend that it is even easier for clients to grasp the reality of making the most of their life by constantly receiving flexible advice designed around what they value and why they value it. David B. Loeper is chief executive and founder of Wealthcare Capital Management Inc.