The Long Goodbye

Joshua Gotbaum

I’ve spent much of the past decade or so trying to improve retirement security, devoting a lot of time to thinking about withdrawals for retirement. This is a challenge we all share.  

The job of a financial adviser, never easy, has become tougher. Thanks to the miracle of modern medicine, retirement is a longer and more expensive part of life. Thanks to the, er, “miracle” of modern financial services, making what once were simpler and easier decisions has become an exercise requiring the skills of a Ph.D. in finance, a medical doctor and a psychologist—and then there’s the competition from the industry’s mega firms. 

PLANADVISER readers are already well versed in the basic rules of helping clients: assessing their financial desires and then considering diversification; their appetite for risk; the mix of active and passive options; fees; etc.  

I’d like to focus on one of the harder parts: advising about how to spend down in retirement. This is a challenge because whatever your clients spend is no longer under your management. Nonetheless, it is arguably the most important reason people need a financial adviser; survey after survey finds that fear of running out of money in retirement is the single most widespread financial concern. 

This means financial advisers have two difficult tasks. First, they must give their clients a conservative idea of how much lifetime retirement income they can count on receiving. There are obviously many calculators available for this purpose, but there’s undeniably a tension between telling a client that you’re working to get them the best risk-adjusted return and noting that, to be safe, they should count on something less.  

One approach frequently offered but relatively rarely accepted is to annuitize at retirement. To be sure, many financial advisers are reluctant to suggest annuitization that will remove them from any involvement with their client’s assets. In practice, many clients are skeptical of annuities too, for multiple reasons: mistrust of insurance companies or insurance salespeople, the irrevocability of the purchase, and the fear that “something will come up” that the monthly check can’t cover.  

… there’s undeniably a tension between telling a client that you’re working to get them the best risk-adjusted return and noting that, to be safe, they should count on something less. 

 An alternative is to consider a managed payout arrangement: a monthly withdrawal in an amount projected, but not guaranteed, to last a client’s lifetime, yet offering the flexibility to withdraw more if something does come up. This managed payout approach will be the default arrangement in the MarylandSaves automatic savings program I chair.  

The second challenge is harder: Without becoming “a salesman,” the thoughtful professional should discuss the benefits and costs of some insurance products. This is not an argument that financial advisers should give up their clients by converting everything to a single-premium immediate annuity. There are other forms of insurance that ought to be considered in many more cases than they currently are, specifically longevity insurance and long-term care insurance.  

Longevity insurance. Longevity annuities provide a monthly payment beginning late in life—typically at age 85—upon payment of a single premium. Recent changes in tax law allow purchases of qualified longevity annuity contracts from tax-qualified plans and individual retirement accounts without creating taxable income. Purchase of a QLAC reduces the otherwise required minimum distributions that, under current law, must begin no later than age 72. QLACs are offered by multiple insurance companies.  

Long-term care insurance. By some estimates, more than two-thirds of adults will need some form of long-term care in retirement, yet less than one person in 10 has insurance to cover it. As with other retirement-related expenses, these costs are better handled by investing during a person’s working life. Further, premiums can be deductible, though only above 7.5% of adjusted gross income. 

None of this is easy, but professional financial advisers can take on this broader form of advice far more easily and effectively than can their clients. And—ultimately—their clients will be grateful that they did.  

Hon. Joshua Gotbaum, a guest scholar at the Brookings Institution affiliated with its Retirement Security Project, chairs the MarylandSaves program and is a trustee of the Pension Reserve Trust of Puerto Rico. He directed the Pension Benefit Guaranty Corporation. The above are his own views, he noted.