Guiding clients through a realistic retirement budget

As financial advisors, we don’t have one-size-fits-all programs to offer our clients. Everyone who comes to us for advice has their own unique needs. They are aware they need a plan, but most have little idea where to start. It’s our role to ask questions, listen and make recommendations that could help our clients relax. We help them envision the retirement they want and let them know what it will take to make it happen.

Good advisors know investing does not take place in a vacuum. Worn-out investment advice might have sounded like this: “Let’s invest, watch what happens, and then figure out what you can spend in retirement.” Today, however, we can better determine what clients want to accomplish during retirement and structure assets to meet their goals.

What clients want to know about allocating assets

According to Morningstar research, informed decision-making about retirement planning can increase retirement income by 31%. This doesn’t mean we must know everything our clients want to get out of retirement immediately; it simply means we must enable them to make informed decisions as their plans take shape.

I like to picture asset allocation in terms of floors and buckets. The “floor” is a client’s basic income needs, including food, clothing and insurance. While some clients can cover their basic needs with reliable income like Social Security and a pension, others can fill the gap with an annuity. If you don’t enable clients to establish a firm foundation of guaranteed income, their entire retirement plan will be shaky.

Once clients lay a solid floor, they can think of the rest of the plan in terms of three buckets: conservative, moderate and aggressive. Prompt them to fill the conservative bucket with short-term investments, such as treasury bills, to allow spending for years. They can fill the moderate bucket with securities like real estate investment trusts or dividend exchange-traded funds to provide steady income and appreciation. Finally, clients can fill the aggressive bucket with stocks.

Annual gains from your clients’ moderate and aggressive buckets will enable them to replenish their conservative bucket. While some point out that this approach leaves potential gains on the table, clients can rest easy knowing they will have enough money during their golden years.

What clients want to know about when to retire

Giving up a career should be an informed decision. Your job is to help clients map out future goals and calculate whether they can afford them. When planning a realistic retirement, there are three primary factors to explore:

1. When people choose to retire.
2. When people choose to claim Social Security.
3. How much people choose to spend during retirement.

Before your clients leave their jobs, make sure they have the facts. Finding work for those closer to retirement age can be difficult. So if your clients discover they miss their jobs or need more money, jobs comparable to those they left behind will be scarce. Research from the Stanford Longevity Center says that clients who are 66 years old can actually increase their retirement income by over 7% by working just one more year.

Losing a full-time job also means losing benefits. Forbes estimates benefits value to be:

• $5,000 to $30,000 for health insurance.
• $500 to $1,500 for health savings accounts.
• 2% to 6% of a salary from matching retirement contributions.
• $1,500 to $4,500 for dental insurance.
• $2,000 to $5,000 for disability insurance.
• $250 to $500 for life insurance each year.

Your clients are eligible to claim Social Security benefits at age 62. Rather than joining as soon as possible, your clients should explore the best time to sign up based on potential insurance value and lifetime payout.

What clients should know about spending during retirement

Spending levels during retirement become limited as soon as full-time work ends. For this reason, you must help clients understand the importance of paying down debt before they retire.

As soon as clients retire, everything they spend will come from either Social Security or their retirement portfolio, although Social Security alone is unlikely to meet living expenses, especially for those who claim early. The Senior Citizens League finds that while Social Security benefits have increased 55% over the past 21 years, cost-of-living expenses such as prescription drugs, Medicare premiums, homeowners insurance and food increased by 101.7%.

When clients rely on their 401(k), they must determine how much they can afford to withdraw. This amount is based on changing circumstances, such as how the portfolio is currently invested, how volatile investment returns are, how long clients expect their retirement to last, and how much they will cut back on withdrawals if the market takes a dip.

Most of your clients will have heard of the 4% rule. In a nutshell, this rule recommends accessing 4% of your savings and investments during the first year of retirement and adding 2% to the total to account for inflation each year after. While this rule is easy to understand, a dynamic withdrawal strategy offers your clients the opportunity to change annual distributions based on market performance. There are many different types of dynamic withdrawal strategies, and each can be tailored to meet clients’ needs.

Essentially, investors on autopilot use the 4% rule until their assets are depleted. Informed investors revisit their retirement horizon, asset allocation and maximum withdrawal percentage every year to determine the optimal amount they can spend.

Where your clients place assets and how they withdraw them make a difference in the amount they have to spend during retirement. Instead of keeping the same asset allocation for tax-deferred and taxable accounts, your clients can learn the benefits of filling tax-deferred accounts with bonds and taxable accounts with stocks. Rather than withdrawing randomly from each, they can learn the importance of efficient withdrawal sequencing by spending taxable accounts first, then tax-deferred accounts.

What clients must know about planning for the unknown

A client’s retirement plan should answer their nagging “what if” questions. What if they live longer than expected? What if they encounter a serious health issue? What if the stock market tanks right after they leave their job?

Devoting some financial assets to guaranteed income products will relieve many of these concerns. Many people ignore annuities as a retirement income option because they gamble on whether they will live long enough to need them. A wiser course of action, however, is to allocate some of the portfolio to an income annuity at retirement while investing the same amount in stocks. This way, clients won’t need to worry about outliving their savings.

A realistic retirement plan is not just a group of investments that will make your clients money. Each plan is crafted to meet specific goals. It’s a collaboration between you and your client and is built on changing goals, needs and circumstances.