Retirement Income Grows Up
Retirement income may be the most extensively-researched topic in the financial planning community today. This research has led to valuable insight for meeting the difficult challenge of sustaining income for a lifetime amid uncertain variables, such as length of life, annual inflation rates, investment returns and future tax schedules.
The “4 percent rule” that may have governed retirement income strategies in recent years is now giving way to much more complex considerations as industry players and academia gain insight into this brave new world of income management.
Retirement Income Strategies Proliferate
At the heart of any retirement income strategy is the quest to find a safe withdrawal rate that allows retirees to draw income—adjusted to increases in the cost of living—for as long as they live.
The income strategies for accomplishing this difficult task are many, including:
- Systematic withdrawal plans
- Bucket portfolio approach to fund cash flow needs
- Laddered bond portfolios
- Pairing an investment portfolio with immediate annuities
- Coupling an investment portfolio with a variable annuity with lifetime income guarantees, or a deferred income annuity
- Constructing portfolios geared to meet the unique requirements of “needs,” “wants” and “wishes”
- Supplementing investments with life insurance to address longevity risk
In addition to these varied approaches, secondary considerations are overlaid, such as the appropriate Social Security strategy and withdrawal order rules of when to tap taxable, tax-deferred and tax-free savings pools.
The “Best” Retirement Income Strategy Is…
As strategies have multiplied, the natural question to ask is, “Which is the best strategy?”
The better question, however, is, “Which strategy is best for my client?”
The definition of “best” is a subjective one that varies by an individual’s circumstances and objectives. Is the “best” approach the one that:
- Produces the most wealth—A traditional measure formed by decades of an accumulation mindset, but may only be relevant for those with excess savings and a legacy objective
- Maximizes retirement spending—A logical measure that addresses the desire to have a fulfilling retirement
- Has the highest probability of sustaining income for a lifetime—A benchmark for those who prioritize a higher chance of success over other objectives
- Minimizes the magnitude of failure—A standard that may address the fear of a catastrophic failure in retirement
Whatever the retirement income strategy, one thing is certain: No one strategy will be best at meeting the multiple and sometimes conflicting objectives of your clients. Consequently, the resulting “best” strategy for your client may be the one which reflects his or her individual balance of the trade-offs that are necessarily required. It’s up to you to determine the client’s needs and which strategy is “best” for them.
See referenced disclosure(s) (1) (2) at http://blog.americanportfolios.com/disclosures/ .