Advisors and Clients Need to Find Their Retirement Income Style

Within the world of retirement income planning, the siloed nature of financial services between investments and insurance leads to two opposing philosophies about how to build a retirement plan. There is an old saying that if the only tool you have is a hammer, then everything starts to look like a nail. This tendency is alive as those on the investment side tend to view an investment portfolio as a solution for any financial problem, while those on the insurance side tend to view insurance products as the answer to any financial question.

As a basic introduction to these schools, a simple litmus test can be applied. Monte Carlo simulations are often used in financial planning contexts to gain a better understanding of the viability of a financial plan in the face of market and longevity risks. Monte Carlo simulations create a randomized series of market returns to test financial plans and their sustainability through various market environments. Suppose a Monte Carlo simulation identifies a retirement plan’s chance of success as 90 percent. Both sides of the debate might accept this as the correct calculation from the software, but they will have dramatically different interpretations of what to do with this number.

For probability-based thinkers, a 90 percent chance is a more than reasonable starting point, and the retiree can proceed with the plan. It has a high likelihood of success, and that’s enough for them. If future updates determine that the plan might be on course toward failure, a few changes, such as a small reduction in spending, should be adequate to get the plan back on track.

Those identifying with the safety-first school, however, will not be comfortable with this level of risk, focusing instead on the 10 percent chance of failure. They make a distinction between essential expenses and discretionary expenses and seek a solution that practically eliminates the possibility of failure for meeting essential expenses. Jeopardizing success, they say, is only reasonable for discretionary expenses.

Financial advisors and their clients should understand which school they most identify with and to what extent their own thinking might incorporate views from each school. Neither school is inherently correct, matching the appropriate retirement income style for a particular client is essential. It ensures buy-in for the plan and a greater likelihood that the client will be able to follow through and feel comfortable throughout retirement. Clients trying to implement solutions that do not align with their personal style are more likely to second guess themselves during inflection points. They might hit the reset button on the retirement income plan, which is expensive and can lead to failure. It is essential to provide clients with plans that fit their personal style.

Advisors able to communicate effectively from both sides will be more likely to deliver successful retirement income outcomes by being able to tailor comfortable plans for their clients. This requires being comfortable with and understanding investments, annuities, life insurance, reverse mortgages, long-term care planning, and many other ways to position assets in comfortable ways for clients. Learn how to do this with the Retirement Income Certified Professional® (RICP®) designation program at The American College of Financial Services. With the RICP® designation you will be able to provide meaningful and sustained value to your clients in their retirement years.