9 Powerful Insights from the Retirement Income Summit

Earlier this week I traveled to Chicago to attend the Retirement Income Summit — a financial advisor industry conference focused on the latest ideas about how to improve and secure retirement income. I saw presentations, met up with insiders in the financial services industry and found a few ideas to help you have a better retirement.

retirement income summit

In attendance were over 300 investment professionals and solution providers and the agenda covered: “insight into the economy, markets, the state of healthcare and trends in retirement planning and Social Security claiming.”

Here is what I think you might want to know:

1. Retirees are Happier but Industry Insiders Think There’s a Crisis

David Blanchett from Morningstar gave a presentation around “Retirement Planning During Market Peaks” where he noted that while Individuals who are currently retired are happy (today) and feel confident about their individual situation – they are also concerned with the overall retirement landscape.

  • 55% of Americans think we are in a retirement crisis
  • 7% of Individuals describe their situation as a crisis

In fact, research suggests that after the stress of building careers and raising kids, most people’s happiness seems to start increasing at around age 65. And, we keep getting happier until it peaks at around age 85.

However, retirement can still post huge challenges — inadequate savings, low literacy, mis-aligned sales people and overly expensive financial products can cause financial failure.

David noted that many people retiring in the near future could face challenges since they are likely retiring near a market peak (based on the fact that the current CAPE (Cyclically Adjusted Price-Earnings) Ratio is near an all time high and future expected returns are likely to lower, so the safe long term drawdown rates will be lower for people.

2. Best Retirement Income Strategies

Overall most speakers were touching on various aspects of how to improve and secure retirement income and several themes emerged.

  • Planning: It starts with Planning. Historically many advisors focused on portfolio management, but that has gotten commoditized. The main value proposition that advisors are focused on now is planning and helping clients make great decisions around coordinating their use of assets.
  • Taxes: There is a huge amount to be gained from properly positioning and drawing down assets over retirement. Some insiders believe the opportunity to be roughly $300K in additional income for a typical $1M portfolio.
  • Social Security: I attended Mary Beth Franklin’s session and also had lunch with her – there remain a large number of opportunities for people to optimize Social Security claiming. (This will be available in PlannerPlus for NewRetirement this year.)
  • Annuitization: With rising interest rates and many more people looking for lifetime income there is a rising level of innovation around fixed, equity indexed and hybrid annuities that are being brought to market.
  • Fixed Income: Bonds haven’t been a great investment in our super low interest rate environment and with rates rising bond prices are falling, so it remains a challenging space right now. However fixed income remains a key part of most expert investors passive model portfolios.

3. Manage Risks

There was a lot of discussion around the big risks people face and how to manage them.

“The median retirement balance in the United States for people ages 56-61 is $25k,” per Michael Batnick. This statistic pretty much sums up the scale of the challenges facing people approaching retirement. Given that – there was a lot of discussion of how to manage risks.

Consumers need help investing – Bob Doll from Nuveen gave a talk on the state of the economy and ten predictions for 2018 which included an updated version of this chart which shows just how poorly the average investor does.

Besides not having enough and dealing with market uncertainty, here are a few other risks:

Health care costs: There is a much greater focus on helping consumers understand what their out of pocket health care costs might be (roughly $300K for a 65 year old couple) based on a personalized assessment of lifestyle, pre-existing conditions and family history. Significant unexpected health care costs remain a huge driver of bankruptcy for workers and retirees.

Complexity: Decumulation (spending down assets) is a much more complex problem and it’s becoming clear that the future is going to be largely built around a digital centric Planning approach. There are so many factors that can be optimized that technology will need to be used to help achieve better outcomes.

Safe drawn down rates: There were a lot of opinions on this given the attendees, but the headlines were the same – people need to plan for longer lives, plan for healthcare, plan for lower returns and plan to use their assets and resources in a coordinated manner to maximize their retirement income and security.

Using home equity: Given the forecasted lower rates of returns and the increase in volatility there was an active discussion around using home equity as part of a retirement plan since it is very often the largest part of a household’s net worth.

4. Consumers need to Watch Out for Hidden Costs & Fees

Some interesting things have happened in the world of retirement investing.

More and more investors are catching onto the fact that buying a low cost index fund is better than many managed investment options. You can get better returns over the long haul at lower fees (much lower).

However, there are still plenty of shenanigans that happen across platform providers as they struggle to adapt with the loss of revenue from formerly high priced mutual funds. Some push RIAs and clients into higher priced products by limiting the availability of better lower cost products in an effort to generate revenue.

Some wirehouses continue to have opaque pricing practices including “soft dollars” and 12b-1 fee kickbacks and conflicts of interest that result in higher costs to consumers.

Investors need to remain vigilant and not be shy about asking about fees and shopping around.

5. Financial Advisors Are Updating How They Help Clients

Financial Advisor offerings and business models continue to evolve and I think get better for consumers. Financial advisor clients are getting better services now that are more aligned with their needs, increasing the overall benefit of an advisory relationship.

Past: In the past, financial advisors were mostly focused on making a sale – they made money on commissions when they helped people buy stocks or insurance. There are 300,000 registered representatives out there who have been focused on portfolio management. This has already been disrupted and commoditized by Robos and low fee passive investing.

Present: Today’s advisors are shifting their focus from investment sales to helping clients with planning. Many advisors build a relationship with their client by helping them to build a plan — often at a relatively low price. The advisors then make money on a fee based model – some combination of Assets Under Management (AUM) and commissions.

Future: Advisors are beginning to realize that portfolio management has been commoditized and their real value is helping with ongoing holistic planning & coaching and helping clients with behavioral finance — making rational not emotional decisions. (This benefit is not to be underestimated. Making good financial decisions can be completely counterintuitive. A good financial advisor can drive evidence based decision making.)

Learn a little bit more about how important behavioral finance can be to your financial security in this podcast: Money, Behavior and Happiness.

6. There is More Pressure on Advisors to Justify Fees

Average wealth management fees are around 1.5%. So, a $1MM client may be paying an advisor $15,000 a year which is likely in their top five annual expense line items (mortgage, food, education, travel, etc). Advisors & platform providers are acutely aware of the fee compression that has happened at the mutual fund level and realize that many clients and potential clients want more transparency and justification of the fees being charged.

Advisors can add a lot of value and many clients are fine with the fees they are being charged (supported by the very low client turnover rate in the industry). However, going forward I think you’ll see more transparency around fees and a better explanation by advisors of the value they are providing.

7. Advisors Want to Help You with Healthcare

Healthcare is a huge concern for consumers, and advisors are working on helping consumers plan better for this. Per above, many advisors are working with clients around actively planning for and managing health care costs in a more personal way.

Advisors are starting to discuss how pre-existing health conditions will result in more specific health care needs & costs and how that will impact their income planning and estate planning. Some are delivering both a financial projection and a personal health care projection that covers expected mortality, morbidity and future health care costs.

This should be good news for consumers since good health is a key part of a good retirement, especially given how quickly health care costs are rising vs. other benefits:

  • Medicare premiums are going up about 10% per year
  • Social Security benefits are only going up 1.5% per year

8. Manage Income to Minimize Taxes

One key area where financial advisors can really help clients keep more of their money is around optimizing when and how you drawdown from savings to minimize how much you pay in taxes.

Many advisors call this integrated holistic planning & decumulation. There are significant complexities and opportunities involved in managing drawdowns and optimizing across tax brackets, Medicare Part B means testing , Social Security and RMDs.

There was a lot more talk about the various strategies that clients could use to optimize their long term income to avoid pushing into higher tax brackets and triggering higher Medicare Part B premiums due to higher income. You can learn more about these strategies here…

9. Huge Numbers of People Need Help and There Are Not Enough Advisors

Market dynamics will probably keep the costs of a face-to-face personal financial advisor high, since there are a huge number of people who need help and a very limited number of advisors who are experts that can provide high value with expertise in retirement. (Many advisors can help you accumulate savings, but not very many have the know-how to help you efficiently use those savings in retirement.)

Additionally there is a huge amount of value to be gained by consumers who have high savings across tax efficiency, appropriate asset allocation and holistic planning that covers anticipated healthcare needs.

Going forward I think you’ll see more digitally enabled advice solutions enabled by remote advisors who can provide a high level of service at a lower cost via teleconference. (Similar to the trends we are seeing in telemedicine.)

NewRetirement — Kind of Like a Virtual Financial Advisor

Whether you work with a financial advisor or not, the NewRetirement retirement planning calculator is proving to be a powerful way to understand and address the challenges of retirement today.

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This is a unique tool that lets you assess where you are now and then adjust and maintain your information over time. This tool has been named a best retirement calculator by the American Association of Individual Investors (AAII), Forbes Magazine, The Center for Retirement Research at Boston College, MoneyBoss, CanIRetireyet and many more.

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