Over the next several decades, retirement income planning will only grow. Planners have so much opportunity to concentrate on income planning as a core competency. I spend a lot of time talking about Americans’ behavior over the last 20 years and why income planning will be paramount for the next 20. Here are four reasons
Our savings rate continues to decline. In December 2017, our savings rate dropped to 2.4 percent.1 If you look at the past 20-year trend, you will see a steady decline in savings, with the exception of high inflation periods or around the dot-com bubble and financial crisis. This has left most people ill-equipped for their retirement. Therefore, we will be asked to create more income from fewer assets than ever before in our careers. We have to get our clients to think differently, and the planning community will have to act differently to accomplish this.
We continue to misuse social programs. As I travel around the country, I always talk to clients who want to get their hands on their Social Security as soon as possible. They fear that the program will be bankrupt in the 2030s. There are some fixes to Social Security that will likely be addressed in future Congresses. For now, the bigger problem is the fact that we completely misuse the system. More than 50 percent of Americans take Social Security retirement early.2 That makes your benefit smaller, and you lose the valuable 8 percent growth of your income between full retirement age and age 70. For some people, that equates to a 76 percent reduction in income. Only 2 percent of men and 4 percent of women take Social Security at age 70, so there is a lot of education that needs to happen in order to secure more guaranteed income.2 With just a 20-year time frame, the difference could be as much as $122,000 in additional income. That makes a big difference for the typical retiree.
Employers remained focus on shifting defined benefit plans to defined contribution plans. That’s good for many employees – low cost investing, multiple subaccounts to choose, tax deferral and matching employer contributions. But, the loss of guaranteed income creates a gap that needs to be filled. When I sit in a plan sponsor’s office, I see a litany of risk-tolerance tests, return sheets and asset allocation brochures. But, when I ask the sponsor to tell me how their participants are going to turn these assets into income, their faces turn blank. Turning assets into dependable income is a priority and makes a baseline for many Americans to be able to buy the things they are accustomed to buying.
In many minds, longevity grows as the most troubling risk for retirees. The uncertainty around how long you will need income remains a fear for many Americans. Providing a plan to address this allows the client piece of mind and, if done properly, enhances the systematic withdrawal strategy. We are living longer at times at the expense of our quality of life. Clients need to plan to make sure they have not only lifetime income but also a plan if a long-term care emergency happens. The odds continue to increase that we will have a care event as we age. Shifting longevity risks for lifetime income and long-term care make sense in many cases. And, the shift of those risks is generally done for pennies on the dollar.
Income planning should be thought of as a great spot to be in as a financial planner. There are large numbers of people retiring and needing planning for many decades to come. Our past behaviors create a reason to change our clients’ perspectives and create value for them. I’m looking forward to the challenge and the growth opportunities in this space.
Income is the ultimate outcome for many retirees. You can’t spend assets but you can spend income. Add retirement income planning to your discussions, and you’ll add value to the client experience.