There’s no magic formula for overcoming the challenges posed by the prolonged low-interest-rate environment, longer life expectancies, and more vibrant (read expensive) lifestyles, instead “seven key principles can help optimize retirees resources,” said Matt Sommer, the head of Janus Capital Group’s defined contribution and wealth advisor services team, at IMCA’s 2017 Investment Advisor Forum.
Make one’s money last as long as one needs it and establishing a spending policy plan creates a strong foundation for achieving this. According to Sommer, a plan requires dividing a client’s potential expenditures into a hierarchy of necessities, wants, and wishes. Then, client and advisor figure out where the money will come from to fund these expenditures, determine when and how allotted amounts could deviate from the plan, and review the plan regularly.
. Retirees generally have income streams from a variety of sources, from brokerage accounts and individual retirement accounts to Social Security and pensions. Sommer suggests creating a single account—a personal pension account (PPA)—that draws on all these sources, but from which all expenses are paid so that retirees can easily keep track of exactly how much they’re spending.
To avoid liquidating assets at the worst possible moments—e.g., stocks during a stock market decline—Sommer recommends that retirees should divide long-term plans into increments. This entails creating cash buckets to fund the PPA for designated time periods. For example, for the first two years, a retiree may fill cash buckets with the most conservative investments, i.e., interest and dividends. The next several years, the buckets may be filled with bond sales and the next 20 years, they might be funded with stock sales.
Because of the low-interest-rate environment, it isn’t likely that retirees can live on interest alone. Sommer explained the importance: Draw on both interest and capital appreciation (a total return approach) to strategically take advantage of longer- and shorter-term investments.
Because different retirement accounts are taxed differently, it’s critical to keep assets in the most advantageous accounts and move or liquidate assets from accounts at the most favorable times. Sommer explains that taxes matter and calls for attending to this asset location, an entirely different concept than asset allocation. While tax policy may change, warranting changes in such planning, Sommer warns against trying to predict changes and making plans based on hypotheticals. Instead, he recommends incorporating wiggle room into planning assumptions.
Sommer calls for maximizing Social Security benefits. The calculation as to when it is most advantageous to begin taking benefits—whether at age 62, 66, 70, or some other time—depends on an individual’s health, life expectancy, other sources of income, and interest rates. Sommer recommends that advisors send clients nearing age 62 Mapquest printouts of how to get to their local Social Security Administration offices as a gentle nudge that they start considering the planning implications of their imminent birthdays.
Annuities could be useful to supplement Social Security and pensions to cover basic needs, which may prove larger than anticipated if an individual encounters, for example, unforeseen medical expenses. Sommer wrapped up with the following: “Consider the potential role of guaranteed income, bearing in mind that annuities come in many varieties with differing tax treatment, fees, surrender charges, investment vehicles, and payout timing.”
