The big boomer issue is the way in which financial advisors produce income for retired clients. The current generation of retirees tends to keep an eye on one number; their level of assets. They want it to stay the same, which has been next to impossible during the recent economic downturn. Many are willing to reduce spending to keep their asset levels up. Of course, the task of producing income for the current generation of retirees is not hard for a number of reasons, including the fact that many have guaranteed lifetime income from defined benefit plans and often their lifestyle needs are not that high.
But it's clear that boomers will be more resistant to reducing their lifestyles in retirement than previous generations. As the current generation of retirees focus on the level of assets they have, boomers will focus more of their attention on the amount of monthly income their advisors can consistenty produce for them, in good times and bad. They will need higher income to pay off their debt, cover their health care costs and deliver their desired lifestyle.
How can advisors address the issue? I suggest the current methods used to produce income will not be good enough in the future. A number of advisors use the "take a little here and a little there" approach. Some take dividends, capital gains (when available) and interest earnings, to produce income each month for clients who need it. But every month requires a new approach. Others set up a large fund in cash and draw from it each month. But this large side fund typically does not produce much income and I think this approach is not as effective as it will have to be in the future.
What will be needed is an investment strategy designed specifically to produce a higher amount of monthly income. It will not rely on an asset allocation that glides slowly to investment in low paying fixed investments because these fixed investments will not provide sufficient income. More of an allocation to equities will be necessary. The asset allocation will have to respond to changes in market conditions much more nimbly than the buy and hold strategies in vogue now. Guaranteed lifetime income products, including life annuities, will be used more because this income helps in planning and produces a higher amount of income per dollar invested than a number of other choices that guarantee stable withdrawals. Finally, income for each client will have to be produced on a more time efficient basis because most advisors will have more retired clients to serve as boomers age.
Boomers will need to derive more income from their investments for a longer period of time than previous generations. They will have to accomplish this by sophisticated systematic withdrawal efforts that protect them against exhausting their resources. Because real systematic withdrawal systems will have to be used advisors will need sophisticated systems for determining if spending, or investment strategies should be adjusted as assets are drawn down and the margin for error is reduced. That is less necessary now, when many retirees try to maintain higher asset levels and thus have more margins for error.
I have not laid out an exact blue-print of how to produce more income for each client. The issue is too complex. But I do believe that advisors have to give more thought to this issue, as do financial services companies. Boomers have always wanted more, and will soon be asking for more income per dollar saved than advisors are used to producing.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.
