Helping Boomers with retirement income ripe for
Less than 5% of advisers have shifted their practice to
serve the Baby Boomer market exclusively, but researchers say this percentage
is likely to grow.
Howard Schneider, President of Practical Perspectives, and
Dennis Gallant, President of GDC Research, have co-authored a report, “Trends
in Retirement Income Delivery: Advisor Portfolio Construction, Product Usage,
and Sales Support,” the fifth in a series of reports discussing retirement
Speaking to PLANADVISER, Schneider addressed how the “hype”
surrounding the wave of Baby Boomers reaching retirement is now the reality.
“Because they are such a huge group, they transform whatever stage they’re
at—parenthood for example. Now, they’re starting to transform retirement,” he
said. However, many advisers are still trying to play both sides of the fence,
he added; they’re trying to service younger clients in the accumulation phase,
as well as older clients facing retirement. Eventually, Schneider predicts,
more advisers will realize that serving the Boomer market—specifically in
dealing with retirement income solutions—is an area worthy of specialization.
Unlike the accumulation phase, in which virtually every
adviser uses a portfolio-planning method, staying within risk parameters, to
build a diversified total-return portfolio, Schneider said such an
across-the-board method has not yet been adopted in retirement income planning.
He said there are three philosophies in the field today. One is to use the same
method as the accumulation phase for the retirement phase—about 40% of advisers
do it this way, he said. The idea is to stick with a diversified portfolio and
withdraw a percentage from it each year.
The other 60% of advisers say this is not wise, as retirees
tend to be more risk-averse than those in the work force and should be given a
different method. The other two methods are the “pool” or “bucket” approach,
and the “income floor” approach. The bucket approach divides assets into groups
according to time—a short-term bucket, intermediate-term bucket, long-term, and
“long”-long term—Schneider said. The short-term bucket would be for living
expenses in the next three to five years. The intermediate-term would
eventually become the short-term bucket, and it would need to be refilled, and
the long-term buckets can continue to be invested for future use.
The income floor approach takes a retiree’s assets and sets
a minimum, sustainable living requirement for the most fundamental expenses,
the “nondiscretionary” things such as housing, health care, and food.
Everything else—travel, charities, home repair—is considered to be
“discretionary” and can be invested in a total-return portfolio (as in the
accumulation phase). If the market does well, those discretionary things can be
attended to, Schneider explained.
How Can Providers Help Advisers Help Clients?
The report says how mutual fund companies, annuity
providers, and broker/dealers have been offering basic support related to
retirement income. Schneider explained that this entails tools and calculators
advisers can use with clients, basic marketing support advisers can use to
target different demographics, and education/training for advisers about rules
and regulations regarding retirement income. Providers are focused on reaching
the adviser market, because it is the gateway to clients, Schneider said.
However, Schneider said it is time for the providers to move
beyond the basics; clients want answers to tougher questions. They are trying
to figure out how they can build a portfolio to last through retirement, in an
environment still saturated with risk, and advisers will need to help them find
Schneider said a disconnect exists between providers of
retirement income solutions and the advisers and clients. Providers are
thinking in terms of income or cash flow; whereas advisers and their clients
are trying to look at the bigger picture. “How are they managing portfolios,
and providing growth and sustainability to stay ahead of inflation and to make
sure they don’t run out of money… it’s not about funding a retirement income
product, it’s about management of the whole picture,” he said.
One other challenge that Schneider foresees happening is
having Boomers accept the fact that some sacrifices might have to be made.
“People are talking about working part-time or starting their own business, but
that’s not going to be possible for everyone,” he said, nor will it generate a
significant amount of money. Considering the longevity Baby Boomers face,
advisers will have to paint a realistic picture for their clients.