Emphasizing longevity seen as key to plans

NEW YORK — Assembling a retirement plan with an emphasis on longevity is crucial in preparing clients for the unexpected, members of a panel at the InvestmentNews Retirement Summit concurred here last week.
Looking at a specific number alone is no way to construct a retirement plan, but setting realistic goals and committing to the plan is the best way to ensure that clients follow through, said Lewis J. Altfest, president of L.J. Altfest & Co. Inc. in New York.
“People don’t just need the right number but a way to structure a plan so that people can follow through on what they want to follow through on,” he said.
A rising risk
“Longevity risk” is on the rise, thanks to improvements in medical care. As a result, advisers must plan for the fact that their clients easily could sail into their 90s, or even beyond 100, without enough retirement assets to meet their needs.
“When you get to 65, you should expect to live another 30 years,” said Philip Edwards, managing director at Standard & Poor’s in New York, speaking at another panel.
Norman M. Boone, president of San Francisco-based Mosaic Financial Planners Inc., which manages $350 million, bases his calculations on the assumption that clients will live to the age of 95 and is keeping open the possibility that some will live to between 105 and 110.
“People need to use some sort of extended age,” he said. “You have to plan for an extended lifetime and not a normal lifetime.”
The best ways to manage longevity risk include making sure clients have multiple income streams, Mr. Edwards said.
Managing that risk also may require the use of some fairly complicated planning maneuvers, such as a strategy known as net unrealized appreciation, said Mark A. Cortazzo, senior partner at MACRO Consulting Group in Parsippany, N.J., which manages $300 million in assets.
The strategy essentially calls for departing workers to take a lump sum distribution of stock and to pay ordinary income tax on the shares’ cost basis.
The net unrealized appreciation would be subject to the long-term capital gains rate when the shares eventually are sold.
“Walking through with a client what the risks are and what the tax benefits are is something that can add a lot of value to a client’s net spendable income,” Mr. Cortazzo said.
In preparing clients for retirement, advisers should be prepared to encounter some emotional hurdles. Many clients, for example, are reluctant to begin drawing from their retirement assets out of fear they will run out of money.
More than money
“The client realizes that the retirement planning process is not just about the money,” said Robert Tendler, principal at Harbor Lights Financial Group Inc. in Manasquan, N.J., which manages $250 million.
“When someone is taking withdrawals from a portfolio, they may not understand the risks of failure and the magnitude of those risks and the issues of longevity,” Mr. Cortazzo said. “You can run out of money before you have strong performance and may not have enough money left when the market does well.”
Such a lack of understanding — and its consequences — can lead to irreconcilable differences.
“Cutting ties with a client is the toughest thing you have to do,” Mr. Cortazzo added.

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