Helping retirees establish a retirement income planning processArticle added by Jason Lampa on February 1, 2010
Jason Lampa MBA

Jason Lampa

New York, NY

Joined: January 31, 2008

As baby boomers move from accumulating assets to drawing on them, they face significant financial risks. Some of these factors include outliving their assets, health care costs, withdrawal rates, and inflation. Due to the complexity of the retirement planning process, it is expected that investors will turn to financial planners to find solutions that will mitigate these risks. This presents an excellent opportunity for investment professionals to develop a standardized process to attract more assets as retirees look to consolidate their life savings under one umbrella.

To capture this opportunity, it is important that investment professionals begin with a simple philosophy on retirement income management:
  • The foundation of all retirement planning should be to provide clients with the highest probability of being able to meet their basic needs in retirement (core expenses such as food, housing, and health care).

  • Retirement income projections should be based on a minimum of 30 years, organized into six intervals of five years each.

  • Provide a solution that will mitigate risks that can be mitigated. Utilize investment offerings that have a high probability of overcoming risks that clients are willing to take.
On the basis that retirement income management is a continual process, I put forth that there are three steps:
    1) Creating the roadmap
    2) Implementation
    3) Ongoing consulting
Creating the roadmap

The first step in creating a retirement income plan for clients is the gathering of information through an in-depth interview process. At this juncture, investment professionals should discuss with their clients how the information that is gathered will be used to create the plan. I would suggest to investment professionals that you look to your firm or an outside vendor to provide you with the questionnaire to gather this data.

The next step of the interview process is gathering a snapshot of the client's assets and liabilities. Included in liquid assets should be retirement plan savings, checking/saving accounts, annuities, and brokerage accounts. On the liability side, information on credit card debt, mortgages, and vehicle loans should be provided.

One of the big advantages to an investment professional that works at compiling a personal balance sheet for clients is the opportunity to see a map of the clients complete financial picture; allowing the investment professional to begin the process of consolidating the clients investments assets over to them.


The implementation stage begins after the client has agreed to the action plan. The advisor, with help from their back-office, will be working with the client to fill out the necessary forms to process new accounts, transfers, and the consolidation of investment assets under one umbrella.

The implementation phase is when the advisor, with the client's input, establishes a withdrawal strategy. Deciding on how income should be drawdown from the client's retirement portfolio is a critical decision that requires that the clients provide the investment professional with full-transparency into their spending habits and core needs (food, housing, health care, etc.).

As a starting point to creation of a withdrawal strategy, I recommend that the investment professional, with their client(s) sitting there with them, log into the T. Rowe Price Retirement Calculator as a way for the investment professional to highlight the difference between having a customized strategy through them or someone creating a retirement plan on their own. Inputs into the online-calculator are as follows:
  • A couple, both 60 years old, retiring at age 65
  • Combined savings of $250,000
  • Combined salary of $120,000
  • Each contributing 15 percent to employer retirement plan
  • Expect $1,000 of monthly income from their investments in retirement
  • Expect social security of $3,630.00 per month
  • Monthly expenses in retirement of $7,500
  • Both individuals live to age 95
  • Currently contributing a combined $10,000 to stock accounts
The results suggest that the client would need an additional $1,400.00 per month to have an 80 percent chance not to run out of savings by age 95.

Here, the investment professional should let the client know that together, they are going to work toward minimizing that $1,400/month gap.

Expenses need to be divided into core and discretionary, respectively. As mentioned above, core expenses include food, clothing, medical and insurance costs, and transportation. Discretionary expenses include things that make retirement enjoyable: traveling to exotic destinations, starting a non-profit organization, publishing a book on a favorite hobby, building a dream house in Costa Rica, etc.

Basically, the core and discretionary expenses can be divided into what your client needs to live and the things they want to purchase to make life more enjoyable.

Fortunately for investment professionals, financial services institutions have recognized the need to provide better tools and products to meet the needs of investment professionals working with retirees. On the asset management side, firms have created investment offerings such as target date funds, lifestyle funds, retirement income funds and managed accounts with principal protection. Insurance companies have responded to the opportunity by creating annuity vehicles with additional riders that factor in market risk, provide guarantees, and alternative payout structures.

The segment method first created by Denver CFP Phil Lubinski was updated and packaged by David Macchia, CEO of financial marketing firm Wealth2K.

In the October 2008 addition of Retirement Income Reporter, Lubinski provides investment professionals with a hypothesized 65-year-old client with about $1.33 million in investable assets.

At the beginning of the exercise, the investment professional assigns 25 percent of the assets to an emergency fund. Then, the rest is dedicated to the creation of income divided into six segments. Each succeeding bucket is allocated less money, has a longer time-horizon, holds assets considered higher in risk, and is expected to grow faster than each of the prior segments.

The segments utilized by Lubinski are as follows:

Segment No. 1 -- Income for Age 65 to 70, the investment professional allocates $280,000 to a five-year period certain immediate annuity.

Segment No. 2 --To be made available at Age 70, $260,000 invested in a five-year deferred fixed annuity.

Segment No. 3 --Ready in 10 years (Age 75), $200,000 invested in a 50 percent equity, 50 percent bond portfolio

Segment No. 4 --Ready in 15 years (Age 80), $130,000 invested in a 60 percent equity portfolio

Segment No. 5 --To provide income from age 85 to 90, $70,000 in an 80 percent equity portfolio at the start and grows for 20 years.

Segment No. 6 --Place $60,000 in equities with about 50 percent in small-cap funds. According to Lubinski, segment six should be worth $1 million when the client is 90 years old.

Ongoing consulting

According to a Fundquest white paper, "A Process-Centered Approach to Retirement Income," investment professionals should conduct quarterly and annual reviews with their retirement clients. Where the quarterly reviews are used to assess progress versus the plan, the annual review can be used to assess the sustainability of the income plan based on investment performance.

The second reason why investment professionals will want to continue the consulting process with retiree clients is to learn about major events related to age, health, and life (e.g., death of a spouse at age 75). Incorporating these major events with factors such as investment performance and inflation requires ongoing communication between the investment professional and their client.

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