When asked what makes them nervous about the stock market, most clients equate stocks with their income for retirement. That way of thinking amounts to "income guessing," not income planning.
The financial professional's role is to help clients remove the guess-work from retirement planning strategies and build confidence in funding both their short- and long-term goals. Those professionals who guide clients through the seven sources of retirement income, and the related potential tax implications, can add greater value to the process. Here are some points to consider.
Controllable versus non-controllable: The professional needs to assist clients with issues relating to basic income needs. This can be done by helping them understand controllable expenses, such as entertainment, hobbies, and vacations, and non-controllable or survival expenses, including food and medicines. This distinction can build flexibility in retirement strategies.
When clients can breathe a sigh of relief that their non-controllable expenses are met, they can take the appropriate risk for expenses they can control.
Visual appeal: Most clients are visually oriented, which makes for the biggest challenge for financial professionals in presenting retirement strategy proposals. Many times, the proposals offered to clients are multiple pages with many moving and confusing numbers.
A retirement planning program should provide a visually appealing way for clients to understand the complex issues involved in retirement income planning before they focus on the numbers. The program should help them understand how income in retirement is not just the opposite of accumulation for retirement.
Seven sources: As mentioned above, financial professionals also need to help clients understand the seven sources of retirement income, including:
- Social Security, the base for most clients
- Employer-sponsored retirement plans or pension plans
- Traditional IRAs
- Roth IRAs
- Nonqualified plan assets
- Continued employment or phased retirement
- Welfare or charity
Getting clients to recognize these seven sources is key, as it is a departure from the traditional retirement model to which they may be accustomed. The traditional model typically identified only three sources–Social Security, pension plans and investments such as traditional stock market funds–with each contributing approximately one third to the retirement fund.
Given the uncertain future of Social Security, the disappearance of pension plans and the recent stock market declines, people are looking for new strategies to help guarantee their retirement income.
This "new normal" for retirement balances liquidity, volatility and rate of return. Now more than ever, clients are interested in principal protection as a major component of their retirement strategy, even if that means they'll only enjoy moderate increases during market highs.
As such, they should understand that within these seven sources come a variety of financial options, such as annuities, which they should consider in meeting retirement income goals.
