Tips for advisers about the help investors crave
When it comes to retirement planning, all decisions are not created equal. Some choices are easy for preretirees, while others feel overwhelming.
Depending on how they see those choices, preretirees may choose to handle the planning steps themselves or seek help — either informally, from family and friends, or from professionals. When they do seek professional assistance, advisers can help them best with focused advice about retirement income needs and sources, withdrawal rates, and financial goals beyond maintaining basic needs.
We recently surveyed investors intending to retire within 10 years to understand their preparations and their confidence in planning for this next stage in life. Our questions covered three types of decisions:
• Transition planning. These are the foundational questions every individual must answer when preparing for retirement — such questions as “When will I retire?” “Will I continue to work in retirement?” and “How much money will I need?”
• Retirement income planning. All retirees must determine how to use multiple sources of savings and income to build a retirement paycheck.
• Holistic planning. Beyond the assets and income set aside for retirement, investors must evaluate how other financial considerations — health care, taxes, home equity — affect their plans.
We found that preretirees felt comfortable making decisions about when to retire and whether to work in retirement. They also think they can manage decisions regarding their home.
The steps they find most challenging are those related to retirement income planning—how they will draw down their assets from sources like their 401(k), pension plans and personal investments. In other words, people struggle with creating a retirement paycheck.
The discomfort with a do-it-yourself approach to retirement income is evident in the limited number of preretirees who have attempted to prepare for it in advance of their retirement. In the U.S., the majority have not started planning for this important task, even as financial assets have become more important in providing regular income for retiree households as fewer workers have traditional pension plans.
Getting a handle on how to generate income from financial assets should not be a last-minute concern. The ability to create a retirement paycheck from them is crucial, and the need is expected to grow.
But while retirement income is an area where preretirees crave help, not enough people receive formal advice for their income questions. About one-fourth of preretirees are going through the retirement transition without structured advice from a financial adviser, an employer plan, or a financial institution.
As more Americans make the transition from preretiree to retiree, they are seeking practical and emotional support with many complex decisions. They could benefit from some good advice, particularly on asset drawdown decisions, and financial advisers should be well-positioned to assist with this important step.
Here are four ways they can do just that:
Plan early for retirement income. Base asset accumulation decisions on retirement income needs. Use retirement income tools to estimate how much will be needed in retirement and how much savings are needed to fund it.
Evaluate the role of financial assets in retirement income. Wealth holdings of households in retirement are heterogeneous and complex. Where will income for the retirement paycheck come from? How much are financial assets needed to provide income in retirement?
Determine a sustainable withdrawal rate. If income from financial assets is needed to support daily living in retirement, advisers can help investors figure out a sustainable withdrawal rate and identify the best payout options.
Consider other investing goals. Some households’ retirement income needs may already be covered by guaranteed income sources. For them, tapping financial assets for retirement income is not necessary — or, at least, not needed immediately. For them, savings behavior can continue into retirement.
Advisers can help those investors determine the best way to invest those assets relative to other financial goals, which may include major expenditures (e.g. housing), family transfers (e.g., funding college costs for grandchildren), health care and long term care spending, as well as bequests.
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