The numbers speak for themselves. Just over half of the 78 million baby boomers will retire in the next 10 years. As a result, the amount of retiree assets that will be converted to retirement income is expected to reach $13.7 trillion in 2015. Eighty percent of these soon-to-be retirees don't have a written retirement income plan—but 50 percent say they'll work with a financial professional to develop one.
All those figures add up to big opportunities for financial professionals—and potentially, big challenges as well. After all, there's no one-size-fits-all approach to retirement income planning. Every retiree's situation is different. And evaluating which strategy is right for each individual can be complex and time-consuming.
That's why it's important for financial professionals to carefully evaluate retirement income planning methods. A new white paper from The Principal, Income Distribution: Comparing a Bucket Strategy and a Systematic Withdrawal Strategy, evaluates two of the top strategies:
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1. Systematic withdrawals. This is a simple and widely-used approach, in which periodic withdrawals are made from an age-appropriate portfolio—such as a target date fund. In our white paper, we used a target-date fund set up for investment through retirement, not just to the target date. The mix of investments gradually shifts to traditionally more conservative asset classes as the retiree ages.
2. Time-based segmentation (a type of bucket strategy). A bucket strategy segments retirement assets by certain categories. The most widely used bucket strategy, based on time-segmentation, allocates retirement assets into buckets that are designed to create income at different time-horizons in retirement. For example, one bucket may have assets intended for use in the first 5 years of retirement, the second bucket may contain assets for years 6-10, etc.
Comparing the two methods
Both the bucket strategy and systematic withdrawal methods have pros and cons. A bucket strategy, for instance, could offer greater psychological benefits to some investors. Having the money segmented and designated for future use may help some investors feel more confident about making their savings last throughout retirement.
The bucket strategy may also help to structure a regular retirement income plan check-up through the redistribution. The redistribution process sets a designated frequency for a financial professional to evaluate the portfolio. A simpler plan may go unchecked for long periods of time.
However, the bucket strategy can also be very time-consuming for financial professionals to implement and maintain. And that increased complexity doesn't necessarily pay off for clients. In fact, the bucket strategy may not offer greater financial benefits than the less complicated (and less time-intensive) systematic withdrawal strategy.
Investors being more confident is the ultimate goal
No product or strategy is the single best choice for all retirees. Financial professionals play a critical role during the transition into retirement, discussing the new risks a retiree faces and helping structure a strategy to help the retiree receive income he or she needs through retirement.
The retirement income strategies financial professionals structure for their clients – whether they use a bucket strategy, a systematic withdrawal strategy or some other method – must be based on individual client needs and risk tolerances. The end result is that, with the help of a financial professional, retirees may spend less time worrying about income sustainability and more time enjoying their well-deserved retirement years.
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