4 Steps to Guide Your Clients into Retirement

According to CNBC, 10,000 baby boomers reach retirement age each day. As such, you are likely seeing large portions of your client base transitioning into the retirement distribution phase. Their assets in defined contribution plans will need to be rolled over and managed by a competent professional. Considering the tremendous wealth held in retirement plans (and the fact that boomers number more than 70 million), this represents a significant opportunity for you.

To help you seize this opportunity, here we’ll discuss four steps to guide your clients into retirement. By developing a solid retirement income planning process, you’ll help your clients make their money last and establish yourself as a go-to retirement resource.

The typical consumer’s perception of a financial advisor is someone who specializes in helping people grow their money since most clients engage a financial advisor during their earning years. But as clients age and start to worry if they’ll have enough to live comfortably in retirement—or retire at all—that perception changes. In fact, according to Boomer Expectations for Retirement 2018, only 25 percent of baby boomers think their savings will last through retirement.

Start the conversation early. It’s best to talk about the distribution phase of a financial plan well before the time comes. If you’re not having this conversation with your clients, they’re having it with someone else! When you broach the subject depends on the age the client expects to retire. For clients planning to retire in their mid-60s, introduce the topic when they’re in their mid- to late 50s. Your focus should be understanding their goals and positioning yourself as the person best qualified to guide your clients into retirement.

Ask about their projected retirement time frame and income expectations. If their vision for retirement is unrealistic, modify their accumulation strategy or encourage them to accept their financial realities. Starting the discussion early will set the stage for more detailed conversations in the future.

Beef up your credentials. Because of the increased focus on retirement income planning, it may be worthwhile to further your education. The following credentials can help you demonstrate your commitment to assisting clients at this stage of life:

• Certified Retirement Counselor^® (CRC^®): Developed by the International Foundation for Retirement Education (InFRE), the CRC program aims to help advisors demonstrate their expertise in serving clients’ retirement planning needs. The program is independently accredited by the National Commission for Certifying Agencies.
• Retirement Income Certified Professional^® (RICP^®): The RICP is an advanced designation offered by the American College of Financial Services. The three-course program is delivered exclusively in video format, with a testing component for each course.

The retirement income planning process can vary depending on the client, but there’s a general framework you can follow. Here, we’ll highlight some of the major steps involved.

Define client goals. If you’ve started the conversation well before the client plans to retire, identifying your client’s goals should be easy. No number crunching, data analysis, or product information is required. Your objective is to let clients know you understand their hopes and dreams. Remember, running out of money is a major concern for boomers, so retirement readiness can be an emotional topic. Sensitivity to their concerns will reassure them you’re prepared to help.

Take inventory of assets and discuss risks. The next step is to take inventory of your client’s financial situation. This is an ideal time to uncover assets your clients may hold elsewhere. For their income plan to be effective, you should be aware of all assets that may affect its success.

Then, you’ll need to have a frank discussion of the risks to the retirement income plan. Are they aware of the effect that a long-term care event or major health care expenses would have on their income? Do they understand how inflation affects retirement assets?

Develop a distribution strategy. Clients have different goals and sources of income. For clients with many accounts with different tax characteristics, you have a greater opportunity to be creative and flexible with their strategy. As a best practice, spend time ensuring that such clients understand how each of these accounts works and why you’ve decided to take income from certain accounts. Clients should know the difference between taxable accounts like brokerage accounts, tax-deferred accounts such as 401(k)s, and tax-free distributions from Roth accounts and insurance policies.

A key element of the retirement income planning process is determining the method you’ll use to convert your clients’ resources into income. We’ll outline three of the most frequently used approaches here.

Systematic withdrawal plan. As the most common technique, the systematic withdrawal plan is your basic percentage spend-down strategy. You look at all investable accounts in their entirety and diversify the portfolio according to the client’s risk tolerance. You and the client then work together to determine an acceptable percentage to withdraw for income—generally between 4 percent and 5 percent. The goal is to sustain the portfolio over the client’s lifetime, so variables like life expectancy and risk tolerance have a significant effect on the percentage. Combined with fixed income amounts from social security, pensions, and other sources, these portfolio withdrawals will make up the client’s total income in retirement.

Bucket approach. Using this strategy, you create separate buckets of money that are managed as separate portfolios, with each bucket representing a different stage in retirement. You work with the client to create as many buckets as needed to support different expense bands, but a three-bucket approach is typical. Many advisors view this approach as easier for clients to understand than the systematic withdrawal plan.

Essential versus discretionary approach. This strategy begins with separating vital expenses (e.g., food, housing, utilities, and health care) from discretionary (e.g., entertainment, travel, and gifts). You then look to create guaranteed income for the essential expenses by seeking products that can produce income with little to no risk. Annuities are commonly used with this strategy, and laddered bond strategies can be employed in conjunction with guaranteed income from social security and pensions. Any funds left over after covering essential expenses fall into the discretionary account.

The benefit of this approach is it reassures clients they’ll never become destitute in retirement and will have enough money to cover basic needs. The drawback is it generally takes a larger piece of the pie to create guaranteed income, so discretionary spending is more severely affected than with the other two strategies.

Many clients dismiss social security as insignificant, but it often accounts for a large part of a retiree’s total income. The maximum social security payment an individual can receive in 2018 if he or she takes benefits at full retirement age is $2,788 per month ($33,456 per year).

Assume your clients are a healthy husband and wife, both receiving the maximum benefit amount. Employing the systematic withdrawal plan, and assuming a 4-percent drawdown strategy, these clients would need $1,672,800 to generate this same amount of income—hardly an insignificant sum.

Deciding when to take benefits is also a hot-button issue. Many retirees take early social security benefits at age 62, but this may end up costing them in the long run. A client who retires at full retirement age with a monthly benefit of $2,788 would have received only $2,091 if he chose to begin benefits at age 62. Conversely, if he had waited until age 70, this benefit would grow to $3,680. Clients with a normal life expectancy are often better off deferring benefits to age 70.

Coaching clients on how to efficiently spend money can be vastly different from coaching them on how to accumulate it. But when you break it down, the core building blocks are largely the same. Sound investment strategies and comprehensive financial planning are still the best practices to use to guide your clients into retirement.

What best practices do you use to guide your clients into retirement? What do you find works the best? Please share your thoughts and ideas below!

Editor's Note: This post was originally published in June 2015, but we've updated it to bring you more relevant and timely information.