By: Phill Rogerson

At Envestnet, we believe it is imperative to equip RIAs with an expanded array of advice and solutions across a broad range of topics, essentially what we call The Intelligent Financial Life™ so that they can address the entirety of a client’s financial wellness picture. When we talk with RIAs about the real financial challenges that investors face, few are more prominent and meaningful than the need to reliably generate income throughout retirement.

Recently, Envestnet | Tamarac hosted an exclusive webinar for RIAs, “Creating Sustainable Income for your Clients,” with our special guest Dr. Wade Pfau, a leader in the retirement income field to shed light on what you need to know about building retirement income plans. Here are some of the highlights from the conversation:

The need for retirement income planning

As the baby boomers move toward retirement, RIAs must solve new problems. Retirement income differs as investors shift their focus from maximizing wealth to creating sustainable income.

RIAs must start thinking about retirement income as distinct from the pre-retirement accumulation phase and understand that the nature of risk changes in retirement. Longevity risk is the overarching concern because it’s about living a long time in retirement. But on the financial side, it’s more expensive the longer someone lives. And with a long retirement, there’s more time for the other risks to become a problem.

Each risk requires different income tools and risk management techniques. Insurance products can and often do play a critical role as one tool to address longevity risk.

Key retirement risks

Retirement risks to consider:

  • Macro/Market includes investment volatility, interest rate volatility, public policy and taxation, and sequence of returns
  • Inflation and the rising costs of living
  • Personal spending, including health and long-term care, helping other family members, divorce, and fraud/theft

Building a retirement income plan involves developing a strategy to manage these risks and considering how long someone might live in retirement. Different planning horizons today factor in gender, smoking status, overall health, and age to help determine longevity. Living beyond 100 has become the new planning horizon.

Different retirement income strategies

There are four broad retirement income strategies to consider:

  • Total Return – developing a diversified investment portfolio and spending consistently throughout retirements
  • Income Protection – known as essentials vs. discretionary as a flooring approach
  • Time Segmentation – looking at investing differently than a total return portfolio by positioning bonds for short-term expenses and stocks for long-term expenses
  • Risk Wrap – building a protective lifetime income floor but with a focus on the upside potential of the market and less on the downside guarantee

Manage retirement risk

When looking at ways to fund retirement spending, RIAs willing to integrate a broader range of retirement tools can better serve clients with strategies that manage these new risks and support client preferences for safety. Examples of funding retirement with bonds, a diversified portfolio, and an annuity were shared. Case studies offered models for fitting annuities into a retirement income plan, illustrating partial annuity strategies and the impact on a legacy.

What does it mean for you?

Pfau concluded by referencing the fact that people have different preferences for retirement income. It’s essential to make sure investors have a retirement income strategy with which they are comfortable and one they can stick with over the long term.

For some investors, it could be an investment-only total return approach, but research shows that two-thirds of the population might want to work from a different starting point. Increasingly, RIAs who can draw from multiple strategies and tools may be better positioned to win in the long-term quest to serve and delight the most clients.

Resources for your practice

For more insights from the “Creating Sustainable Income for Your Clients” webinar, you can watch the replay here. You can also download a copy of Wade Pfau’s new whitepaper “Annuities as an Asset Class for Fee-Based Advisors”.

Learn More

At Envestnet, we want it to make it easier than ever for you to incorporate protected retirement income into client retirement planning strategy. With the launch of our new Insurance Exchange integration with Tamarac, RIAs now have access to a digital resource center that provides an overview of the exchange resources available including information on Outsourced Insurance Deck (OID) partners and carriers. Check out our resource center!

Our Wealth Solutions team is here to help you learn more and explore how you can take advantage of this new capability to help meet the needs of your clients and expand your solutions offering to help grow your business. Set up time with the team here.

This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that any investment, asset class or factor subset will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.

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