PLANADVISER - July/August 2018 - 47

to achieve their goals and get them to save more.
Similar to the support they can offer to Millennials,
advisers can help Gen Xers analyze the interest rates
they are paying on their various forms of debt versus the
company match and potential growth of their retirement
plan, Collinson says. Some forms of debt have a much
higher interest rate, she notes. On the other hand, if an
individual has more modest student debt structured at a
low interest rate, this gives him an opportunity to optimize
how he thinks about saving while paying down debt.
Cutting against some of the arguments made by Biggs,
Collinson says it may not be a great idea to include Social
Security as a main pillar of the retirement planning of
Gen Xers and Millennials. " Social Security may look very
different 30 or 40 years from now, and advisers and sponsors
need to be very mindful of that when helping participants
in their savings and retirement income planning, " she
points out.
Baby Boomers Hit the 'Red Zone'
For Baby Boomers, it is retirement planning crunch time,
and, thus, many of them are already squarely focused on
retirement readiness and eager for support. For their part,
plan sponsors and advisers should remind Boomers to " be
proactive to be employable by maintaining good health,
performing well at their current job and keeping their job
skills up to date, " Collinson says.
For those Boomers who have already met this year's
$18,500 contribution limit, advisers should also make sure
they are aware of the additional $6,000 catch-up contribution
they can make when 50 or older. Baby Boomers should
also revisit their asset allocations to be properly invested
for their age and risk tolerance. " Financial advisers and
plan sponsors are in a wonderful position to deliver those
messages, " Collinson says.
Johnson agrees that the proper asset allocation is critical
for Baby Boomers, particularly within five years of
retiring-when they are in the " red zone. "
" Take, for example, someone who retired at the end of
2008, " he says. " If they were invested in the S&P [Standard
& Poor's] 500, they would have seen their assets fall by 37%
in one year. Just as a football team cannot afford to turn
the ball over and fail to score points when inside the opponent's
20-yard line, the retirement investor can't afford a
big downturn in the retirement red zone. This is what is
referred to as sequence of returns risk. Taking risk off the
table right before retirement is a prudent move. "
Related to sequence of returns risk is decumulation of
assets. Advisers and plan sponsors need to help retiring
Baby Boomers create a drawdown strategy, Collinson says.
" Relatively few plan sponsors offer an annuity as a payout, "
she observes. " This is something for them to consider. If
they are concerned about fiduciary liability, they can at
least provide information about the types of retirement
income strategies available and point participants in the
right direction. "
Thomas Dodd, executive director with Pavilion Advisory
Group in Chicago, emphasizes the importance of plan officials
taking time to compare and contrast common retirement
income strategies-defining the pros and cons of each
method as viewed from the perspective of Baby Boomer
participants.
" The first step is to encourage pre-retirees to develop
a withdrawal plan, in contrast to withdrawing money in
an impulsive manner based solely on immediate spending
needs, " he suggests. " Retirees may have a feeling of wealth
when they see their account balance but not realize how
little it provides when converted to an annual income. To
help ensure a retiree does not run out of money, a systematic
withdrawal plan is preferable to no plan at all. "
A withdrawal plan should be developed with attention
to the risks that increase the likelihood of running out of
money. These include, but are not limited to, longevity risk,
investment risk, inflation risk, liquidity risk, standard of
living risk and behavioral risk, Dodd says.
" There are a limitless number of withdrawal plans available
to retirees, but we tend to focus on those that have
gained at least some acceptance and usage and, most importantly,
are rules-based, " he says. " These withdrawal plans
fall into three categories: investment earnings, systematic
withdrawals and annuities. "
Under the investment earnings approach, interest and
dividends are withdrawn and form the basis of retirement
income. The principal of the assets is left intact. A variation
of this is to also withdraw the realized capital gains. The
second approach, systematic withdrawals, involves a rulesbased
strategy that is managed either by the retiree or an
adviser. These strategies also generally fall into three categories:
constant dollar amount, the endowment method
and the life expectancy method.
Annuities, the final approach, can be explained simply
as a series of payments at fixed intervals guaranteed for a
fixed number of years or the lifetime of one or more individuals;
the options available to retirees are plentiful.
" Which of the three withdrawal strategies should
a retiree choose? There are advantages and disadvantages
to each, and the trade-offs can be analyzed across
four dimensions, " Dodd concludes. " Is the level of income
provided adequate? How predictable is the income amount?
How liquid are the retiree's assets? And what level of advice
or guidance does the retiree want? " -John Manganaro
KEY TAKEAWAYS
* Many Millennials bear enormous student loan debt and
need help budgeting; they are also especially risk-averse
due to the Great Recession.
* Gen Xers may be saddled with both the need to raise
children and care for aging parents, all the while saving
for retirement.
* Boomers should be reminded to take advantage of the
catch-up provision in 401(k) plans, maintain good health
and perform well at their job; they also need help with
decumulation strategies.
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