Solving the retirement income puzzle one piece at a time

The aging of the U.S. population isn’t just a challenge for demographers. It’s also a test for financial advisors tasked with solving the retirement income puzzle for clients.

The following statistic underscores how important retirement income planning is to a practice’s success: All baby boomers will be older than 65 at the start of the next decade, U.S. Census Bureau data show.

The takeaway: That’s a big pipeline of retirees, many who will be seeking guidance on managing their retirement nest egg. And it creates an opportunity for you to position your practice as the go-to source for comprehensive retirement income solutions and develop a more loyal and committed client base.

It’s your chance to stand out from the competition by helping clients put all the pieces of the income puzzle together. That means going beyond conventional wisdom and simplistic rules of thumb. Focus your advice on these three key puzzle pieces: (1) spending in retirement, (2) Social Security claiming strategies, and (3) tax-efficient account withdrawal plans.

It’s vital to show clients a workable plan to meet their financial needs in retirement. Let clients know, for example, that spending in retirement isn’t smooth from year to year. You can help give them peace of mind by building a plan to manage “spiky” spending periods. Making sure married couples understand that coordinating their Social Security claiming strategies is a way to generate the most household income over their lifetime helps boost confidence, too. Advising clients on which type of financial accounts to withdraw from—and when—to help minimize taxes and why a Roth IRA conversion might make sense can also empower retirees.

The more specific and strategic a retirement income plan is, the better. It’s not enough to simply explain sources of income, such as Social Security, pensions, and retirement savings. Nor is it enough just to estimate how much a client will need to cover essential expenses in retirement and end the conversation there.

Instead, dig deeper and go beyond conventional wisdom. Clients want a plan they can rely on. They want to know how they will pay bills, cover emergencies, manage spending volatility, leave money for the kids—and have some fun, too. Perhaps check off bucket list items like a European river cruise or playing 18 holes at Pebble Beach.

Take the time to fully understand each client’s specific circumstances, worries, and goals. Then map out a holistic retirement income plan for them in which each of the three key puzzle pieces fits together.

The benefit of that personalized approach? It will reduce nagging nest-egg worries that keep your clients up at night. The more you can reduce money-related angst, the more your client can enjoy their golden years—and the greater likelihood they will see the extra value you bring to the planning process and view you as a trusted resource.

Stand out by going beyond the conventional wisdom

Provide retirees with personalized guidance. America’s aging population is increasingly seeking guidance on how they can best maximize their retirement savings and make their money last after they stop working.

The goal is to build a flexible income plan that anticipates and manages surprises. Education is key. Two-thirds of pre-retirees don’t know how much they can withdraw from their retirement accounts each month. And 43% are unsure how to tap their retirement accounts in a tax-efficient way, according to T. Rowe Price research.

Help build client confidence and enhance retirement outcomes. A personalized, comprehensive approach to creating retirement income can empower your clients. A well-designed income plan can help retirees keep more of their money by optimizing their Social Security benefits and saving on taxes, and emphasize tax-efficient distributions from accounts that result in smaller withdrawals. This creates a longer runway for their remaining savings to grow. Those types of financial wins result in better financial outcomes—and a more engaged and enduring client base.

How you can become a go-to source for retirement income advice

By talking through the many factors that go into an effective retirement income plan, your clients are more likely to make sound financial decisions. But the key is to show them how your expertise enables you to go a step further and offer better solutions than the conventional wisdom approach.

1. Discuss strategies to manage spending volatility. You can add value and differentiate yourself by debunking conventional wisdom about spending in retirement, such as spending increasing every year with the rate of inflation.
   Instead, first stress that average retiree spending actually rises by 2% less than the rate of inflation, which gives them more wiggle room in their budget. Explain how the retirement income plan you create takes into account spending variations from year to year. Point out that there’s no such thing as a smooth spending curve from the beginning to the end of retirement. Stress that the plan accounts for the typical higher spending that occurs in the early years of retirement when bucket list items like trips abroad are checked off, as well as “average years” and “quiet years” when spending dips.
2. Identify the best age to claim Social Security benefits. Disabuse retirees of the notion that blindly taking benefits early at 62 or spouses viewing their Social Security claiming strategy in isolation results in the most optimal outcome. Stress to couples the importance of viewing benefits in tandem with the goal of bringing in the most income over the couple’s lifetime. Both spouses claiming benefits at age 65 or at full retirement age, for example, might not be the most optimal income strategy. Discuss why it’s vital when evaluating claiming options to consider who the higher wage earner is and what longevity looks like for each spouse. Note, for example, that if the husband is the higher earner but has a shorter life expectancy, it makes sense for him to wait to claim benefits until age 70. The upside? The larger benefit continues as the survivor benefit for his wife’s lifetime. Explain why factoring in spousal benefits and survivor benefits is a must.
3. Emphasize tax-efficient withdrawals. Explain how clients can stretch their retirement savings with tax-efficient withdrawal strategies. One effective strategy is to fill up lower tax brackets when taking withdrawals in taxable accounts. The goal: Avoid creating so much extra income from Traditional 401(k) and IRA withdrawals that it pushes the client into a higher tax bracket. That could result in a bigger tax bill and the need to withdraw more money to pay the higher IRS bill. One way to avoid so-called bracket creep is to take tax-free withdrawals from Roth accounts in years when expenses are higher than normal.

Another example is to provide insights on when a conversion from a Traditional IRA to a Roth IRA makes the most sense—and the best ways to do conversions and pay less in taxes. Doing a Roth conversion in lower-spending years at a lower tax rate, for example, provides a tax-free source of income in higher-spending years when larger withdrawals are required. Explain to clients why this strategy means paying more taxes up-front at the time of the conversion but allows them to pay zero taxes in the future when they withdraw the money.

In short, guiding clients through critical decisions related to retirement income and creating income plans that help aging clients focus on spending volatility, Social Security optimization, and tax-smart withdrawal strategies is a critical skill set. It can help you build a better rapport with your clients and boost their retirement readiness. What’s more, it acts as a growth strategy for your practice. Earning a reputation as a retirement income specialist when an entire generation is beginning to tap their retirement savings can separate you from the competition.