The need for comprehensive retirement income planning services increases every day, as more and more people near retirement without the security of a defined benefit pension plan. Because pensions are becoming a thing of the past, and Social Security usually represents only a fraction of the income needed by modern retirees, a huge potential income gap exists that must be planned for in a very responsible way.
At United Solutions Group we are hard at work building, testing, and refining various income planning strategies for the population who are nearing or already retired. With the body of academic
research growing at an ever-accelerating pace, the challenge is to custom model each plan to each client’s needs, and to make sure it fit’s in their overall goals.
Below, are just three of many Retirement Income Strategies that we believe are an integral part of a comprehensive plan. While this is only a short list, knowing the principles behind each of these three distinct approaches will allow our client’s to make the right choices. We believe that the following three strategies are the foundation that one should consider before digging deeper into any of the more advanced plans.
1. Systematic Withdrawals – Often described as the 4 percent safe withdrawal rate strategy, this income planning strategy involves taking withdrawals from a growth-based annuity portfolio that is rebalanced regularly. The main concept here is to monitor the clients’ spending each year and make adjustments to withdrawals to match credited returns, so as to avoid running out of money during the client’s lifetime. Because this strategy requires regular, ongoing maintenance and is dependent on market returns, it falls into the category of a “probability-based” income strategy.
2. Flooring / Essential versus Discretionary – Sometimes called “expense-matching,” this income strategy pairs a floor of lifetime income, generated by an annuity income stream with the essential expenses projected for the retired client. Discretionary expenses (big trips, “wants”, and inflation protection) are met with assets invested in a growth-based portfolio, apart from the income floor. Because discretionary expenses are by definition, non-essential for daily existence, the risk of minimal growth does not pose a disastrous threat to the retiree’s financial security. This income strategy falls into what you might call the “safety first” category.
3. Bucketing / Age-Banded – This income strategy involves the use of time buckets of money. For example, a 3-bucket strategy might have our client’s place enough money for the first 5 years of retirement income into bucket 1, the second 5 years into bucket two, and years 11 and beyond in bucket 3. Each bucket might contain assets of increasing levels of growth and possible returns, aligning nicely with the client’s investing time horizon. The buckets may be filled with conservative-to-aggressive growth-based annuities or even short-duration (5-year payout) annuities in buckets 1 and 2, with GLWB or GLIB annuities, or a SPIA in bucket 3.
While each of these 3 income strategies has its own advantages and disadvantages, all are viable income plans when used in alignment with the client’s objectives. Our objective here is not to give you all of the nuances that can lead you to favor certain approaches, but to make our client’s aware of the different choices that can be considered. The body of knowledge continues to grow quickly in the area of retirement income planning, and United Solutions Group advisors are without a doubt a cut above the rest of the retirement advising community.