The Yawning Knowledge Gap On Retirement Income

Blunt thinks the survey demonstrates that many advisors don't know how to work with income products, even though they see retirement income opportunities.

"They'll need training and tools to make it happen," he predicts.

So will consumers, he says. "If people think it's safe to pull out 10% a year from retirement savings, they'll never annuitize." And if liquidation expectations don't stay in the 4%-5% range, advisors "will never be able to tell the annuitization story."

Even liquidation at 6% is probably "way too high," he adds. The fact that 26% of advisors believe clients can safely withdraw 6%-10% a year is "scary," he says.

William E. Bartholomew, an insurance agent at Glatfelter Agency, York, Pa., says he has just completed two years researching what other advisors are doing in this area. He spoke with marketers around the country, asking, "What are you doing?"

Now, he has developed his own approach. For wealthy individuals–those with $3 million or more, say, who want $50,000 a year in additional funds (over other monies)–he will recommend using, say, $1 million to pay out 5% a year. The money is spread between three annuities in a type of split-annuity arrangement, factored at 5% growth on the deferred side. A sophisticated program guides how the original funds will be "restored" over a certain number of years. (With the other $2 million, the clients do with as they please.)

"To use more than a 5% factor in any of this is foolish," Bartholomew says, citing the uncertainties people face in retirement.

Clients to whom he has already introduced the approach "like it," he says. "The older clients agree on the 5%, while those under age 55 tend to want 8%-10% from their money."

The older people are much more realistic, he says.

For clients having $1 million or less, "it gets tough," Bartholomew says. "If they want to count on 8%-9%, I won't work with them unless they sign off on my recommendation or they can convince me they will die at age 89."

Bartholomew concedes he "could be wrong" in his projections, but he says this is his best judgment knowing what he knows now. "I don't think anyone knows what will happen," he adds. "But I do sense real fear about the uncertainties."

Charles Yanikoski, president of Still River Retirement Planning Software Inc., Harvard, Mass., believes the 40% of consumers who say they don't know how much they can withdraw from their retirement nest eggs are "absolutely correct.

"Actually, if 100% of them said that, it would be even more encouraging, because consumers really don't know. Advisors don't know either."

He views the 5% withdrawal rate as conservative, and projections of 5%-9% percent as "less conservative" and "unrealistic."

Over the years, Yanikoski says he has learned that "many people don't understand percentages, even if they use a calculator." So, approaching clients with a percentage in mind may be fruitless.

In fact, he thinks using even the conservative 5% a year as a rule of thumb is unrealistic. "It assumes people withdraw the same amount a year and then die; in reality, people have changing cash flow needs over time."

For instance, he says, a newly retired couple may pay off the mortgage after five years so they suddenly have greater cash flow. Someone else may have unexpected expenses that require a major withdrawal.

"Plans should be based on cash flow needs, not a level amount per year," Yanikoski says.

Furthermore, even with the assistance of stochastic modeling, people don't know what the future will bring, in the stock market, world events or anything else.

Since people don't know, he says they and their advisors should "do what people always do when we don't know something–take our best guess and do some contingency planning."

Annuitization and purchasing an income annuity are probably "great concepts" for people who realize they "don't know," Yanikoski adds. "It helps them live a lifestyle, or somewhere, indefinitely."

Advisors need to be realistic when talking to clients about retirement income, maintains Mathas. They may need to say, "You're spending too much."

That can be a difficult conversation, he allows. Also, some advisors may not yet be comfortable with presenting the income annuity as a solution, and some are not comfortable selling guarantees at all. Others don't like the idea of shipping assets to an insurance company to manage.

"Still, if they don't tap into immediate annuities, they can't manage the longevity risk with income that lasts a lifetime," Mathas says.