5 key questions financial advisors should explore with retiring clients

With the ongoing impacts of COVID-19, inflation and three interest rate hikes set to come this year, those who are planning to retire in 2022 might have more fear about the longevity of their finances. They might be questioning if now is really the right time to retire with the future so uncertain.

Sri Reddy, CFA and senior vice president of retirement and income solutions at Principal Financial Group in Des Moines, Iowa, shares five key questions that financial advisors should explore with their clients who are planning this year to exit the workforce and cash in on their 401(k) plans.

1. Has the client considered guaranteed income options like annuities to ensure they have a steady paycheck in retirement?

One of the first things we tell advisors to look into is the amount of non-discretionary income their clients will need in retirement for basics such as housing, food, and health care. The good news is that the vast majority of non-discretionary income can be met by a client’s Social Security benefits, depending on how much they made pre-retirement.  In addition, many clients may have a pension plan from their employer that will start in retirement.

To augment this guaranteed income, advisors and clients can discuss annuity options. Even in markets with low interest rates, mortality credits offered within annuities can help clients sustain a higher guaranteed income stream. The principal alone can go a long way if you’re not managing to a specific date.

2. How will they really pay for their wants and needs?

There may be a perception among clients that they can withdraw heavily during a market high to have extra spending money. Advisors should warn against overdrawing or setting up a series of withdrawals just because the market is doing well. The market can fall rapidly, cutting into your savings. In addition, if you’ve already reduced your investments, you may not see the growth benefits when the market goes back up.

It’s also important to remind clients that retirement is not linear. There will be changes to your spending habits over time. It could be that spending drops as you reduce or change activities. Then again, you may see increased costs if you or a spouse moves into long-term care. There are many life events in a person’s household that will change their desire and ability to do different activities.

Advisors can consider a bucket approach to managing their retired clients’ portfolios. For the first five years, their spending may be higher than it was while they were still working as they finally do the things they’ve been saving for, like splurging on an extravagant vacation. The next five-year bucket may plan on reduced spending, followed in later years by another bump in spending due to growing health care needs.

It’s important to keep in mind that most clients can achieve their spending goals even with less savings or a greater spend-down plan. Indeed, research shows that many people are so fearful of running out of money that they are at greater risk of underspending than overspending. As long as their non-discretionary needs are met with guaranteed income, advisors can help guide people toward spending more on their wants and desires.

3. Would a phased approach to retirement (i.e., working a few hours a week) enable them to live the life they envision – whether that’s traveling more or doing renovations on their home?

Phased retirement is definitely something that advisors should talk about with their clients. Finances are only a part of life – money is essentially an enabler for us to live and do the things we want to do. Research has shown that retirees benefit from structure. Having a plan to do nothing all day is not really a plan. Volunteering or even part-time work can bring both joy and purpose to retirement.

Clients should also consider whether their spouse is okay with them suddenly doing nothing. The rate of divorce among couples over 65 is escalating in part because baby boomers are the first generation where both members have been in the workforce. Retirement is the first time they’ve spent full days at home together over a long period. This can be a difficult adjustment that should be considered in retirement planning.

4 and 5. How have inflationary impacts altered their thinking on retirement income? Is the tried and true “4% rule” still right for them? Should they consider a lower withdrawal rate, such as the new 3.3% rule suggested by Morningstar?

First of all, taking a lower withdrawal rate is unrealistic for many new retirees. Then when inflation shows up, so do higher interest rates, which impacts their real net return and possibly shifts their consumption choices. There isn’t much a retiree can do about higher heating bills. But advisors can work with their clients to have more flexibility and resiliency to make financial adjustments—such as eating out less often and cooking at home.

Fortunately, Social Security is adjusted for inflation, as are some traditional pension plans. Advisors need to ensure that clients have adequate equity exposure to keep up with inflation over their life expectancy.