Income Planning for Today, Tomorrow and 30 Years From Now

By Bill Kauffman, Vice President, Financial Solutions

  • Originally published May 30, 2013 , last updated January 16, 2018
Income Planning for Today, Tomorrow and 30 Years From Now

I speak to a lot of agents and advisors who are still looking for their niche in this industry — their market, so to speak. They could go into estate planning, business planning or retirement planning, but I almost always try to steer the conversation toward income planning.

That might sound like an obvious choice, given that, over the next decade or so, 78 million baby boomers will reach retirement age. All of them face the same question: “how will I convert my assets into a steady income stream that I can’t outlive?”

Answering this question is not easy. It takes planning, discipline and a lot of good decisions and good solutions to overcome a menacing lineup of risks in retirement: longevity, inflation, environmental conditions and health care. These risks have changed dramatically in the last 10 years or so, and our products, processes and really our entire industry need to change as well to help our clients deal with them.

Here’s a quick run-down of the retirement risks your clients face and how they’ve changed over the years.

Longevity — When I was a young man, I remember there was a butcher in our neighborhood who retired at 65 and then died just a few weeks later. Stories like that today seem incredibly tragic — someone works their whole life and then dies before they get a chance to enjoy a well-deserved retirement. However, back then that was fairly common. You might say that sounds pretty cold, Bill. But life expectancy just wasn’t what it is today. Today it’s much more unusual that someone dies at what we now consider a relatively young age. We hear stories every day of someone in our town, city, state or surrounding area that just turned 100 or more. Willard Scott, for those that remember this famous network weather man, made a career out of recognizing those that have been married for an exceptionally long time or have reached the age of 100+.

Now your clients expect to spend 30+ years in retirement. Some people might live 1/3 of their lives in retirement. Spread out over 30 years, even $1 million only pays $33,333 per year, and that doesn’t account for inflation — our next threat.

Inflation — The impact of inflation can be measured as the erosion of buying power and the increase in price in consumer goods. Obviously, the longer your clients live in retirement, the more inflation becomes a concern. In just 15 years, 3% inflation can reduce buying power by 36%. Over 20 years, purchasing power declines by 43%. After 20 years the $33,333 in income we talked about is really equivalent to $19,010 per year.

And that’s the best case scenario. Some economists are predicting double-digit inflation in the not-too-distant future. “We may not see any real inflation for two years — or even three or four,” Lance Roberts, chief economist for StreetTalk Advisors told MoneyWatch in March 2012. “But when it comes, it’s going to come fast and rampant.” Yikes.

Other Environmental Conditions — Aside from inflation, your clients have to worry about a host of other adverse scenarios like a market downturn, historically low interest rates, tax increases, etc. Part of income planning is helping your clients understand these risks and putting safeguards in place to shield them from the effects.

Health Care — Of all the risks your clients face in retirement, this might be the scariest. The average health care costs for an individual in retirement are expected to be upwards of $250,000. Have your clients prepared for this? How would a long-term care situation affect your client’s portfolio? If one of your client’s big goals is to have money set aside to leave as a legacy to his children and grandchildren, you had better have a plan in place for protecting those funds.

Looking at the risks above brings some other questions to mind:

  • How have your planning techniques changed to make sure your clients are prepared for an extended retirement?
  • Have you changed the way you think about income planning and how you communicate the risks to your clients?
  • How are you reshaping your practice to help your clients deal with these new threats?

A couple thoughts on changing your techniques and reshaping your practice.

First, your clients are more reliant on Social Security than ever before. It’s the only asset that offers government-backed, guaranteed, inflation-adjusted income for life. You literally can’t buy a more efficient source of income anywhere else. So, as part of the income planning process, you need to be helping your clients make the most of this asset. Using a tool that calculates the optimal Social Security election strategy, like Social Security Timing®, advisors can regularly uncover more than $100,000 in additional Social Security benefits for their clients.

Second, if you truly want to brand yourself as an expert in this space, I highly recommend increasing your education. I would recommend studying to obtain one of the following designations:

This is where our industry is going. If you plan working another 10 or 20 years, I would strongly advise you start learning the techniques and best practices that will put your clients in a better position and position you as a true advisor to your clients.