For 15 years, I have worked with retirees, helping them understand the role home equity can play in creating better retirement outcomes. In 2015, I was challenged to expand my knowledge and expertise of retirement by becoming a Retirement Income Certified Professional (RICP) through the American College of Financial Services.
At first, I was hesitant because I had not come from a traditional financial planning background and I didn’t know if I could handle the concepts. Undeniably, I now realize it to be one of the best decisions of my life. Understanding the principles of retirement income has helped me better serve my clients and has shaped every conversation I have with a client. I hope to share some of the wonderful, life-changing, retirement-boosting concepts from which all of us who serve baby boomers can benefit.
The Retirement Income Revolution
Quietly and almost imperceptibly, there has been a shift in the financial services arena. If you were not paying close attention, you may have missed it. The language of retirement planning has subtly added a word to its vocabulary. The word is “income.” One word has made a world of difference. Every professional who makes their living working with those at, in or near retirement must understand its significance.
Is Retirement Income Really a New Idea?
What is the difference between retirement planning and retirement income planning? Retirement planning has referred primarily to saving for retirement, or the accumulation phase. The emphasis was upon allocating assets in order to help clients generate enough wealth for retirement. By definition it simply means “how to grow the nest egg and generate as much wealth as possible for the day of retirement.”
Retirement income planning, however, is a relatively new discipline. Early musings began in the mid-2000s, but the term was not really codified until 2010 when the American College of Financial Services gathered insurance and financial service leaders at the Retirement Income Summit.
Three Differences Between Retirement Planning and Retirement Income Planning
There are many differences between the two disciplines, but here are three that I consider the most important:
- The Challenge of Coming Down the Mountain
The chief goal of retirement income planning is focused on how the individual will draw upon their nest egg in order to create enough predictable income to cover all of their remaining life without having to change their lifestyle to do it.
Herein lies a good way to describe the accumulation or savings phase of retirement planning: summiting Mount Everest! Every year, hundreds of climbers attempt to climb the mountain with their Sherpas, and many make it to the top. Our clients had a goal in terms of the money they wanted to save (their number) and they worked hard, saved and sacrificed. Finally, upon summitting, they planted their financial flag at the top of financial Everest. Mission accomplished, number attained, time to retire!
But the truth of the matter is that nearly two-thirds of the deaths that occurred on Everest have happened on the way down! This is the first and perhaps most profound difference between retirement and retirement income planning. The latter is all about what happens after you plant the flag. The descent, or the distribution phase, is where the real retirement dangers lie. It’s when one comes down the financial mountain that risks can be costly, unrecoverable and even financially fatal.
- The Challenge of a Rapidly Changing Landscape
It may come as a surprise that retirement as we know it today is a fairly recent phenomenon. This contemporary experience is a product of the 20th century. The notion that a person would work, accumulate money and then live 20 to 30 years on that money is a product of modernity. As one article noted: “In 1884, Baltimore and Ohio Railroad establishes the first pension plan by a major employer, allowing workers at age 65 who had worked for the railroad for at least 10 years to retire and receive benefits ranging from 20 to 35 percent of wages.” This is fantastic, excluding the fact that life expectancy in 1884 for men was not even 47 years of age!
The rise of the baby boomers, those 76 million individuals born between 1946 and 1964, has already shifted the demographic landscape. Now, approximately 8,000 retire daily. Their biggest challenges are related to the grim reality that they have not saved enough to cover their projected life expectancy. Therefore, creating and maintaining lifelong income for this demographic will require tremendous skills and an openness to see and do things differently.
- The Challenge of Building Genuine Consensus
It is a commonly known fact that those who have a financial planner and a written plan will do better in retirement than those who don’t. The retirement income revolution has given way for a new type of guide to emerge: a financial planner who not only knows the way up the mountain of retirement but who is equally trained in getting you home as well. The challenge that lies before us is in finding common ground in the uniqueness of this new model and creating a plan to implement it. Most of the issues that require examination revolve around a clear understanding of the actual risks of coming down the mountain, how many risks exist and what to do about them. The timing of Social Security, the methods of distribution, as well as the most efficient order in which to draw your nest egg are just a few planning points.
RIP Has a New Meaning
Retirement income planning simply means that our clients want to retire in peace before they rest in peace. In this article, you saw that R involves the descent down the mountain; I means creating income for life; and P is planning with consensus and research in view. Your clients are counting on you. Perhaps you will never become a professional financial guide, but learning the principles will certainly help you navigate new terrain and position your practice to prosper in the years to come.