For many pre-retirees, market volatility has altered the retirement horizon
by George “Skip” Saideh
Mr. Saideh, ChFC®, is a Financial Planner with Centinel Financial Group, LLC in Needham Heights, MA. He can be reached at 781.446.5011 or by email at ssaideh@centinelfg.com.As we enter another year, many investors still continue to worry about the economy and its effect on their short and long-range retirement goals. Although there is often time to recover and adjust for many investors who are in accumulation mode, the investor who is ready to retire now has some difficult decisions to make and issues to face.
Some of the first questions clients ask when they are ready to retire are: Do we have enough? How much of my savings can I spend? And how long will our money last? These questions are addressed every year during retirement planning and portfolio reviews, but when it comes time to actually retire everything becomes more real and calculated.
Reassessing intended withdrawal rates
This is where intended withdrawal rates from the portfolio become paramount. Withdrawal rates have been a key factor in retirement income planning for ages; however, as a result of the last five years of economic volatility, there are more dynamics that come into play that can affect that rate. Clients always need to consider their age and health, the potential impact of inflation and the variability of investment returns earned on their savings.
They also need to consider if clients plan to leave a legacy to their heirs and the impact of future RMDs. In this day and age, areas that need heavy emphasis in planning withdrawal rates are the resulting debt and expenses that many clients have incurred during periods of home refinancing post economic crisis – causing long-term debt to follow them in retirement – and the fact that most clients vastly underestimate the expenses they will incur for healthcare in retirement.
Many clients associate retirement healthcare expenses with traditional illness and doctor visits and do not realize that the cost of Medicare and supplemental premium expenses can be substantial. Clients also tend to underestimate the risk of extended long-term care costs and the effects that has on their portfolio.
The Durable 4% Rule
The standard rule of thumb for withdrawal planning has traditionally been around 4%. Implying that 4% is how much clients might consider withdrawing every year from their retirement accounts, and help reduce their risk of not running out of money, assuming all other risks are properly managed.
The challenge with withdrawal strategies in general is that the withdrawal rate is being determined at a fixed point in time, and clients still need to cover debt, such as refinanced mortgages or other liabilities that could carry on for many years. It is important to remember that withdrawal rates should be a basic starting point, with a broader view on how to bring clients through retirement. Meaning, the withdrawal percentage should be regularly monitored and adjusted based on maintaining a constant focus on risk management.
The spend-down that can occur rapidly in retirement due to the competing demands of essential living expenses, and unexpected expenses, needs to be carefully balanced when determining the distribution rate. To help sustain the retirement portfolio, it is important to not only focus on risk management and asset allocation, but also product diversification. Although these strategies cannot promise the objective will be met, they can be a valuable starting point when planning for your retirement strategy.
A lot of products to choose from
There are many products that, used in concert, can help provide a balanced approach for accumulation, income and protection of principal. There is not one consistent product answer or approach to solve all distribution needs, so financial professionals need to understand their clients’ intentions, debts and liabilities, portfolio mix and risk tolerance.
This is where a prudent, comprehensive planning approach to using products such as annuities, cash value life insurance, long-term care insurance (or products with LTC withdrawal features), managed portfolios, principal-protected products and alternative investments in addition to more traditional investment strategies can come into play.
You want to strike a balance between the clients’ consumption of assets, so that there is room for lifestyle changes, most notably the potential need for long-term care down the road. Income distribution planning in retirement has always been a differentiating factor for financial professionals; however, it becomes more of a challenge when clients are planning amidst economic volatility and higher incidents of potential debt.
Understanding the importance of withdrawal planning can not only assist with the emotional and financial needs of your clients in retirement, but it can also position your practice in this continually evolving area of practice.
Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered Investment Adviser. 160 Gould Street, Suite 212, Needham Heights, MA 02494. 781.446.5000. Centinel Financial Group, LLC is independent office of John Hancock, Signator Investors, Inc. and any affiliated entities.
