In a perfect world without risk, achieving a secure retirement income would be relatively straightforward: run the numbers, allocate the assets, and monitor the cash flows. But in reality, of course, risks are unavoidable and the planning process is much more complex.
Lincoln Financial Group's Ben Huddle, CFP, CRPC and director of Financial Advisory Services and Rob Studin, CFP, CLU, ChFC, executive director of Financial Advisory Services, have created a presentation, "Retirement Income Security Planning," which discusses these risks. They note that every retirement plan faces five serious challenges:
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The recognition of these risks isn't anything new, Hubble points out. Studin and Huddle address these challenges by starting with a basic premise: "For an individual's basic needs, which would include housing, transportation, utilities, and things of that nature, we wanted to try to ensure that there's a stable source of income funding those that's going to last a lifetime," says Huddle.
Many advisors rely on rules-of-thumb for annual portfolio withdrawals, typically in the 4 to 5 percent range. That approach concerns Studin and Huddle. "(Studies have shown that) if you withdraw four to four-and-a-half percent that you should be OK over a lifetime," says Huddle. "But 'should be OK' doesn't lend me a lot of comfort. I don't want to build a retirement plan on 'should'."
Increasing life spans are another factor that increases the uncertainty in projections. Huddle notes that for couple age 65, there's a 17 percent chance that one of them is going to live to age 100. That duration would strain most portfolios' ability to generate income.
