The days when investors felt comfortable leaving all their winnings in the market at retirement are long over. Today's retirees want security—or some promise that their assets will last. Financial advisors who ignore these concerns risk watching assets walk out the door and into the arms of rivals who have tools that can assure retirees their money won’t disappear before they do.
“I think clients are saying, ‘I’m really worried about retirement,’ and ‘Will I have enough money?’” says Frank McAleer, senior vice president and head of managed and retirement solutions at Janney Montgomery Scott, a financial services firm based in Philadelphia. “It increased after the 2008/2009 stock market levels and then skyrocketed, and people in their 50s saw assets decrease 30 to 40 percent. They asked, ‘How am I going to get back from this?’”
Software makers are addressing these worries. From mainstays in the market like MoneyGuidePro to new launches such as Finance Logix’s new Retirement Income Optimizer, all can show investors their basic needs are covered, at least. Some firms, such as Wealth2k, break up expenses into time segments or age brackets using different investing strategies for separate points in retirement. Others, like ESPlanner, incorporate sophisticated algorithms to address not just when to take Social Security but how to maximize that income stream.
While the focus of each of these tools may be a little different, the response is motivated by the same shift in mindset. Investors are done gambling with their retirement. After weathering the downturn of 2008, and seeing real estate holdings drop in value too, nearly all want advisors to offer some guarantee that the assets they’ve worked hard to build will be safe.
Read The Cards
Janney felt so strongly about mitigating client stress, it turned to Finance Logix for a new tool: the Retirement Income Optimizer. Janney started beta testing the tool with its reps in May.
The tool determines both what is mathematically possible and what is workable given a client’s personal situation. For example, a 50-year-old client who makes $60,000 a year might want a guaranteed income stream in retirement, such as an annuity, and software might suggest socking away $10,000 a year to create that security, says Oleg Tishkevich, CEO and founder of Finance Logix based in Tucson, Ariz. It will offer the tool widely on June 28. (He says preliminary retail pricing is $600 a year, with discounts available for enterprise clients.)
“But in reality, how many people making $60,000 a year can afford consistently to do this,” he asks. “That’s not realistic.”
Advisors can customize matrices to consider multiple details before building a solution, which can include their own product suggestions or methods. Advisors will also be able to factor in Social Security, allowing investors to see their income if they take the benefit early in retirement or later. This comes out in Phase 2, expected to roll out by the end of 2012.
Finally there’s a compliance element, giving firms like Janney some oversight concerning what the program suggests for clients, and the direction an advisor actually takes. More automated compliance tools are also coming in Phase 2. Overall, Janney wants to assure clients it’s aware of
their concerns.
“If you ask most people in their 50s and 60s if they can maintain their standard of living when they retire, the answer is, ‘I don't know,’” says McAleer. “Most clients want to know if they can survive. [This program] answers that question.”
Cover The Floor
For Dr. Somnath Basu, there’s only one thing that can assure clients’ basic expenses are covered in retirement: a fixed annuity.
“If you want luxury, if you want a Rolls-Royce, you should use stocks and bonds,” he says. “But don’t fool around with the floor,” he says, referring to basic non-negotiable spending needs.
Basu, a professor of finance at California Lutheran University in Thousand Oaks, Calif. and director of its California Institute of Finance, is also founder of AgeBander, a software solution currently being overhauled. It breaks retirement into three life stages, calculating fluctuations in everything from health care costs to shelter, and ensuring they’re covered.
Once retirement is broken into time bands, expenses can be targeted to these stages, rather than calculated as a lump sum that needs to be saved. While advisors can’t currently download AgeBander—Basu is currently upgrading the program—he believes they can take his theory and put it into practice today.
“It should be a very simple answer,” says Basu. “When it gets complicated, that’s when the screwups happen.”
Annuities also play a large role in MoneyGuidePro:G3, its latest version, being pushed out to the independent market by mid to late July.
Bob Curtis, founder, president and CEO of PIEtech, designer of MoneyGuidePro, has added a tool called the Guaranteed Income Stream. This tool looks at the shortfalls investors may have in retirement and considers solutions, like annuities, for the difference. Another tool, Social Security Maximization, shows clients how to get the most from that benefit by looking at strategies such as timing. Both tools fold into MoneyGuidePro, which has a single user list price starting at $1,295 a year.
When it comes to Social Security, “People don’t generally like to wait,” says Curtis. “They wonder, ‘What happens if I won’t live long enough to get the full benefit?’ Now they can see if it’s worth it to wait, and that you don’t have to live to 90 to do better.”
Don’t Fence Them In
Alex Murguia likes annuities too. But he believes the best solution is one that allows advisors to consider any product when calculating an investor’s income needs later in life. InStream, a program that the managing principal of McLean Asset Management launched in November, runs Monte Carlo simulations to ensure retirement income needs are on track to be met. Advisors are alerted if the probability of successfully meeting those needs drops below a certain percentage, a number selected by an advisor.
Murguia believes a plan should be structured enough to protect the long-term needs of investors—but be flexible enough to adapt to that 72-year-old client who suddenly gifts her son $100,000. So instead, assets can be invested in any product from ETFs to mutual funds—multiple classes of products that basically build a dividend. If the income dips, the program suggests ways for the portfolio to produce the distributions needed again.
“You’re building a plane and flying it at the same time,” says the McLean, Va.-based Murguia. His program is free, but earns revenue when reps link to insurance brokers for additional financial products in an online marketplace. “It’s hard to lock in assets and not touch them for three to five years. There’s not just market volatility but also personal volatility.”
Smooth Ride
There’s just no need for volatility in the opinion of Laurence Kotlikoff, a professor of economics at Boston University, a former senior economist with the President’s Council of Economic Advisers and the founder and president of ESPlanner, a financial planning tool.
Instead, Kotlikoff is an advocate of “smoothing,” where reps plan for a client’s maximum life expectancy, calculate a conservative rate of return to ensure needs are covered in retirement, and spread the savings needed to reach that goal over the client’s lifetime.
“To get to that 75 to 80 percent [replacement income], investors take on too much risk to make targets that are totally inappropriate,” says Kotlikoff, author of several books on retirement including The Clash of Generations. “You put yourself at risk of having lower levels in the future.”
His program, which starts at $199, with a $50 annual renewal fee, is designed to create a balance between the savings and retirement years. The program considers income, taxes, and spending behavior and then lets you look at scenarios that involve downsizing, reverse mortgages, or the onset of Social Security payments. Kotlikoff says most investors see the living standards rise by 10 to 15 percent with the program, even as they save for retirement. The software also assumes money invested in the stock market is unavailable while still invested in those assets.
“We treat investing in stocks just as a casino,” he says. “The stock market is a better bet than a casino. But we say we’re not going to spend anything from the money in the market, or its winnings, until you leave the casino, and come home.”
Away From The Edge
For Wealth2k’s founder and CEO, David Macchia, proposing more risk than is absolutely necessary to create a retirement nest egg may actually be an ethical issue—one reps should not ignore.
“It’s a moral question,” he says. “If a client cannot risk that capacity to meet expenses, then an advisor cannot deny them that guarantee.”
Wealth2k’s The Income for Life Model looks at an investor’s essential spending needs, or floor, and crafts ways to cover these needs with guarantees, such as Social Security. Instead of a three-bucket approach, or three bands of time, reps can craft two to 10 buckets to cover the retirement years—and use a variety of solutions that consider the duration of an investment product, the rate of return on each bucket, and also inflation.
Macchia believes that retirement income planning is not a “static exercise,” but something that needs to be monitored constantly as expenses may increase, an inheritance may come, or a client may go back to work. He dislikes the systematic withdrawal idea of 4 percent a year, believing that many investors don’t have the luxury of having all their assets just riding along.
The Income for Life Model allows financial advisors to segment what’s needed for basics, create a guarantee for those expenses, and then expose what he calls an “appropriate amount” to upside risk. The program costs $35 to $99 a month.
Macchia, based in Boston, Mass., believes firmly that advisors who don’t start addressing retirement income needs with their clients early on will be caught flat-footed when investors near retirement. While software programs are now giving reps more tools to tackle these issues, responsibility still lies with the advisor to assure clients their assets will last—and that they’re the right advisor for the job.
“Otherwise they get a ‘Dear John’ letter, thanking them for their past excellence in service, with clients moving to another advisor who claims expertise in retirement income,” says Macchia. “It’s a zero sum game. You manage the lifelong accumulation of assets or you’re left with nothing.”