Retirement planning calls for straight talk, panelists agree

With retirees facing numerous challenges — including the uncertain future of Social Security, low savings rates and the likelihood that many will live longer than expected — financial advisers need to have frank conversations about retirement planning with their clients.

“We’ve got to set aside old rules and recognize that we’re in a new environment, and because of that, we have to find a different way of approaching this whole issue,” David John, senior research fellow at The Heritage Foundation, said last Monday during a panel discussion at the InvestmentNews Retirement Income Summit.

First off, he said, advisers need to push clients to save more.

Fellow panelist Zachary Parker, director of annuities and insurance at Securities America Inc., agreed and suggested that advisers segment clients by their savings habits into “significant” savers, who don’t want to withdraw more than 4% of their retirement assets each year, even if they can afford to; “delusional” savers, who don’t have enough savings to retire but think they do; and clients who want to withdraw 4% to 6% of their retirement savings each year but are basing that rate on 100% of their assets.

The last group, he said, should be asked what will happen if there are unforeseen medical expenses or other emergencies. This group may also be helped by some allocation of their retirement savings to guaranteed-income products, Mr. Parker said.

Of course, the group that represents the biggest challenge for advisers is the “delusional” group, Mr. Parker said. “You have to set expectations, to [ask them to] maybe work longer and spend less, and if you can’t [convince them], maybe it’s better to let them walk out the door, because they’re just going to cause more trouble down the road,” he said.

For those clients who will listen, it is useful to give them a visual — based on levels of wealth and quality of life to which they aspire — to help them work through the retirement-planning process, said panelist Don Ezra, global director of investment strategy at Russell Investments.

Clients should also understand that they have three “dials” that can be adjusted to help them achieve their retirement goals: spending, investments and longevity protection, he said. No matter what withdrawal level or retirement plan is chosen, Mr. Ezra said, it is important for advisers to monitor these areas regularly for changes in wealth and investment performance.

One adviser in the audience said that it is a big challenge to have what is often an uncomfortable conversation, especially knowing another adviser might skirt the subject.

“The difficulty is telling clients what they need to hear, when there are a lot of people who will tell them what they want to hear,” said Mark Cortazzo, a senior partner at Macro Consulting Group.

“If someone says they can take 7% a year, and I’ll tell them you can’t take more then 5%, they may go with the other guy,” he said. “People just don’t understand the risk they’re taking.”

E-mail Hilary Johnson at [email protected].