I was recently having an in-depth conversation with one of my clients, and he said perhaps one of the truest statements I’ve ever heard when it comes to retirement planning. While we were discussing some potential ideas for him and his wife, he said:
“You know, you will probably create hundreds of these plans over the course of your lifetime. But, me, I only get to do this once…so I can’t afford to mess it up.”
Naturally, he was thinking about himself and his family when making this statement; however, his mindset reflects the thought process of plenty of workers today. The idea is that you only get one shot at having a successful retirement, so one had better make it count.
As more and more Boomers move into their retirement years, those of us in the financial industry are beginning to see changes in the retirement planning landscape. For one, people are living longer—-much longer—than they have in the past. In fact, I have a relative in my own family that worked for 34 years and is now entering his 31st year of retirement. How crazy is that?!
One might expect that with the Baby Boomer generation creating such demand for retirement planning services, there would be some definite benchmarks for how to measure retirement success. Unfortunately, the only thing our industry has agreed about is our disagreement on how to plan for retirement; and the continuous information dump provided by the internet only adds more layers of confusion and noise.
Some advisors will argue that retirement is all about “safe money” or “not losing” your nest egg, and others will stand for the exact opposite, saying “nothing beats the market over time.” The debate is endless, and in many ways, it can seem pointless, as proponents often care more about pushing their viewpoints than hearing those of their opposition. In the middle of this battleground stands the client, who just wants to enjoy a secure and safe retirement. In my opinion, this could quite possibly be the worst environment for someone who genuinely wants advice because they’re trapped in a world of debate about financial products.
So, how does someone go about trying to plan for their retirement? What should be the focus?
In my opinion, the most important facet of a retirement plan is having sources of guaranteed cash flow.
Now, for the sake of this discussion, let’s qualify what I consider to be guaranteed vs. non-guaranteed. In my view, guaranteed income sources would be: social security, pensions, or income from annuities (contractual guarantees only).
Income that I personally do not consider guaranteed is: bond interest, dividend payments, rental income, or any other type of distribution from a portfolio of securities.
Of course, this is the point where everyone’s biases begin to run wild, and they debate starts to rage. “How can you say that ______ is guaranteed?” or “Clearly, you must not understand the income reliability of __________.”
The goal here isn’t to get lost in the minutiae of social security reform proposals, pension funding, or the actuarial reliability of investment products. The point is this—- Cash Flow is what matters in retirement.
In the July 2014 Issue of the Harvard Business Review, Robert C. Merton writes:
“To begin with, putting relatively complex investment decisions in the hands of individuals with little or no financial expertise is problematic…More dangerous yet is the shift in focus away from retirement income to return on investment that has come with saver-managed DC plans: Investment decisions are now focused on the value of the funds, the returns on investment they deliver, and how volatile those returns are. Yet the primary concern of the saver remains what it always has been: Will I have sufficient income in retirement to live comfortably.”
Sadly, I believe that Merton is 100% correct in his beliefs. Financial discussions that focus on retirement planning are too often dominated by conversations about portfolio returns—-recent returns or projected returns—take your pick. Instead, we should be helping clients understand how the income pieces of their plans can fit together to establish an overall cash flow strategy.
From there, we can allow the clients to help determine what level of fluctuation they desire in their income streams. Naturally, some clients will not want to have any fluctuation; therefore, they will gravitate towards more of their assets being dedicated for income. Yet, some clients, will find themselves more open to some fluctuation, as long as they have a nice baseline of guaranteed income. These clients may be more inclined to place more assets in a growth-oriented strategy that allows for market fluctuation.
Our role as retirement income planners is to help clients navigate the multiple decisions they will face as they transition into the retirement season of their lives. But, I can honestly say that I have yet to meet with a client who didn’t have the desire for knowing their retirement cash flow potential as a very high priority. Workers today spend much of their energy in focusing on returns—too much energy. Returns are important; however, I don’t believe they should be the dominating factor in a planning process. If we want to work with the massive numbers of Baby Boomers moving into their retirement years, the conversation needs to begin with cash flow—-that’s where these clients experience their money and their retirement.