Three retirement income strategies you can use with clients
Your clients spend most of their adult years saving for life after work. So it’s no surprise getting ready for retirement often brings a mix of emotions. Regardless of how they feel about retirement, most enter with some uncertainty around generating income.
By creating a retirement income plan you can ease some of the worry and show clients how they can enjoy life without breaking the bank. Consider using one of three primary strategies as you pull together a tailored plan based on each client’s needs and goals.
1) Flooring strategy
For this strategy, needs are covered by guaranteed income like Social Security, pension payments or annuities. Your client’s retirement savings can be invested and go toward funding wants. Some find comfort in this approach because it continues the guaranteed “paycheck” they’ve been used to receiving during their working years.
When considering how to use a client’s retirement savings for additional guaranteed income, read our whitepaper (based on proprietary research) on how to build retirement income.
Alleviate some risk of outliving savings
Allows for optimal spending
Exposure to market volatility
Limited access to assets used to purchase the guaranteed income
2) "Safe" withdrawal strategy*
With this strategy, an individual withdraws a specific percentage from their investment portfolio annually. In its simplest form, you take the overall portfolio account balance and apply a withdrawal percentage to determine annual income. You want to anticipate how long savings will need to last and assume an annual rate of return.
May protect against inflation
Exposure to market volatility
Your withdrawal rate may need to be adjusted
Safe withdrawal rate may not meet income needs
Potential to deplete savings faster than desired
3) Bucket strategy
This approach involves breaking retirement into distinct time increments as opposed to treating each year as a single time period. At its core, it’s about choosing investment options that seek to perform and deliver certain outcomes at different times throughout retirement. For example, bucket one might cover spending during the first five years, bucket two spending during years six to 15 and bucket three expenses in the years after that.
Appeals to human preference for smaller time frames
Avoids emotional investing
Requires time commitment and ongoing monitoring
Need help creating a retirement income plan for your client? Reach out to your Principal® representative.
*The term "safe withdrawal strategy" is based on the research and publications of William Bengen. He modeled a portfolio with a 50% allocation to stocks and 50% to bonds, using intermediate-term treasuries as the fixed-income component. He determined that an individual who started withdrawals any time between 1926 and 1976 could have lived off the portfolio for at least 30 years if he or she made 4% annual withdrawals that were adjusted for inflation, which he considered to be a "safe" withdrawal. Ten years later, Mr. Bengen added small-cap stocks to his model, boosting the withdrawal rate to 4.5%.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
PQ12571F | 635881-102018 | 11/2018
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