The five years before and after retirement are critical to the overall success of a retirement income plan, and advisors who know how to talk with clients about retirement risks – and the strategies and tactics to overcome these risks – are better poised for success.

In an nationally televised episode of WealthTrack, Consuelo Mack sat down to talk about retirement issues facing Americans with Professor Jamie Hopkins, JD, CLU®, RICP®, co-director of The American College New York Life Center for Retirement Income, and Steven Earhart, CLU®, ChFC®, CFP®, MSFS, RICP®, a financial advisor and owner of Devon Financial Partners in Wayne, Pa.

Watch the clip and read highlights below.


Talking About Retirement and Income With Clients

Hopkins and Earhart, who both hold the Retirement Income Certified Professional® (RICP®) designation, use the interview to highlight topics that advisors and clients should be talking about when it comes to retirement.

As many conversations around retirement go – this one focuses on risk. There are 18 major risks in retirement, but according to Professor Hopkins, there are two big ones that stand out: market volatility and uncertain lifespans. What happens in the marketplace during the first years of retirement can dramatically impact how far a retirement portfolio can stretch. Couple this with the longevity risk – not knowing how long a person will live – and it puts financial advisors in a situation where expertise in creating sustainable retirement income strategies is in demand.

Delaying Social Security

Having a good picture of your clients’ physical health and the role Social Security will play in retirement is key, both experts agreed.

Social Security is the “floor” in income planning, where it’s going to provide some level of money that we can rely on that’s protected against inflation, Hopkins said. He notes that the inflation protection provided by Social Security is a huge benefit for the millions of American who will rely on Social Security as a primary stream of retirement income.

If clients are healthy, the “optimal strategy,” according to Earhart, “is to delay collecting Social Security for as long as possible, which is typically age 70.”

Misconceptions of the '4 Percent Rule'

Earhart noted that although the “traditional” line of thinking about retirement is that a 4 percent withdrawal rate is sustainable, for today’s retiree, the  4 percent withdrawal strategy is a risky strategy.

“Really, 4 percent is pushing the envelope,” he said. “It’s too much. You have to be careful of anything north of 3 percent.”

The reason? People are living longer than ever before; a 4 percent withdrawal rate may turn out to jeopardize the retirement income plan. A client who lives much longer than expected will run out of money too soon.

Sequencing of Returns

An old rule of thumb in portfolio management was to have a constantly decreasing ratio of stocks to bonds, Hopkins said, noting that increasing bond holdings over time was previously thought to best mitigate risk. Many people allocated retirement portfolios using the “your bonds should equal your age” metric, which would mean that if a person is 80 years old, they should have 80 percent bonds in their portfolio, and 20 percent in stocks.

“The research really doesn’t support that anymore,” Hopkins continued. “A much more steady allocation works better in the long run.” He said that a more balanced approach to the portfolio allocation is the best practice today. However in the first five years leading up to retirement, and in the first five years afterward, the portfolio strategy should shift. Bad returns early in retirement can significantly impact the sustainability of a retirement portfolio, Hopkins said, adding that it’s the sequencing of returns that really matters.

“If the market drops 30 percent the first year of retirement, as a percentage I’m pulling a very large amount out of the account,” he said.

Hopkins said that even if someone averages 8 percent in gains throughout retirement, they should really only withdraw half of that or less to keep retirement income sustainable.  

Using Home Equity in Retirement

Hopkins and Earhart have differing opinions when it comes to using home equity in retirement. Earhart said he thinks that home equity should be a “last resort” when it comes to generating retirement income.

“The house is an asset. To tap into a reverse mortage when you don't have to, I think that starts a chain of events,” he said, adding that avoiding a reverse mortgage gives a person more options down the road. “Now, if someone is never going to move and they need the income, then I think [a reverse mortgage] makes total sense.”

The house is the largest asset most Americans have, larger than stocks and bonds, Hopkins countered, adding that regulations around reverse mortgage products have changed significantly in the past two years.

Go back to the stock market in 2009, Hopkins said, and imagine you’re withdrawing retirement funds out of your portfolio and the market tanks 40 percent.

“Do I want to withdraw from my portfolio when it’s down 40 percent, or borrow from my house at 4 or 5 percent?” he asked.

If you’re willing to age in place, you set up the reverse mortgage so it's there if you need it. If the market drops you can use that asset instead selling of your stocks during a market downturn, Hopkins said.

The Takeaway: Expert Strategies For Retirement Income

Closing her segment, Consuelo Mack asked Hopkins and Earhart if each could recommend  one action we should take or one investment we should make to have a successful retirement.

Earhart said locking in some kind of guaranteed income stream to cover fixed expenses for life. In addition to Social Security, it could be an annuity strategy or other means of guaranteed income, he said.

Because taxes can really eat into retirement income, Hopkins suggested tax diversification as the one thing people should do. With a vehicle such as a Roth IRA or Roth 401(k), you pay taxes up front, but by converting IRA or 401(k) assets into untaxed Roth accounts as you near retirement, you can be better positioned for lower taxes during those non-working years.

“As we near retirement or are just entering retirement, our income levels might drop which means lower taxes. This creates an opportunity to pay taxes on the IRA at a lower tax rate,” Hopkins said. Even better, because the Roth accounts don’t have required minimum distributions, they’re not treated as taxable income in retirement, and they help you manage the taxability of other retirement assets as well.

The retirement issues and topics outlined in this post are just the tip of the iceberg from  the engaging conversation between Hopkins, Earhart and Mack. Make sure to watch the full WealthTrack segment to hear Hopkins and Earhart discuss additional retirement income strategies and topics, including annuities, long-term care, and more.

If you’d like to learn more about providing more value to your clients as they plan for  their retirement years, read “The Guide to Being a Successful Retirement Income Planner.”

Your clients want to retire. Are you prepared? Download your free guide

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