PLANADVISER - May/June 2019 - 44

beyond (k)
According to Hernandez, a historical look at market
cycles and at a hypothetical 60% equity/40% fixed-income
portfolio shows that the portfolio returns were predictable
over a seven-year rolling period of time. Therefore, when
an adviser discusses retirement readiness with someone
within seven years of retiring, he needs to consider the
person's sequence of returns risk and whether savings
should be moved to safer investments.
" I determine with people how much it will cost to live
per month in retirement and work backward from that to
suggest a savings amount, " Wisniewski says. " There's an
amount that is 'acceptable,' covering basic expenses and
medical care, and an 'ideal' amount-what would allow for
going out to dinner or traveling. Once those amounts are
determined, we can figure out how much a person needs to
save for each goal. The earlier one starts to save, the better. "
To back into a savings rate in this way, Hernandez
says, " the projections need to predict rises in income and
assumed rates of returns [ROR]. Adjustments for determining
retirement readiness can be made throughout an
employee's career. "
Conversations for Different Situations
Wisniewski says the retirement readiness conversation
varies based on the individual's income group-low, middle
or high-but all should understand that they need more
than Social Security.
According to Hernandez, for a lower-income worker,
Social Security will probably be a proportionally larger part
of retirement income than for someone who earns more.
That same person is much more conscious of expenses and
the need to pay bills and may already expect a more frugal
lifestyle in retirement. An adviser can help that person plan
a budget for retirement and, perhaps, show him how to pare
down spending, both now and in retirement.
However, Amabile says, retirement readiness conversations
can be unpredictable when looking at compensation
alone. " You may have a lower-paid employee who lives in a
low-cost-of-living area, but with a spouse who works, who
may be in a better position to retire than a higher-compensated
employee who lives in a high-cost-of living-area and is
the sole income provider, " she explains.
Foguth says his conversation with individuals is the
same no matter their income. He assesses what amount they
will be need monthly, then figures out where the income
will come from. " For example, if a person needs $5,000 a
month in retirement and he knows Social Security will be
$2,000 per month, he has to solve for only what he is short.
Maybe he has a pension plan that will provide $1,000. He
then needs to look at other savings, " Foguth says.
For participants who want contractually guaranteed
income, an annuity is the only option, Foguth says. " The
question is, which annuity is right for you? " He suggests
advisers warn clients to stay away from variable annuities
with expensive riders-or any annuity with a rider. Immediate
annuities or deferred income annuities are preferable.
" These days, every insurance company has an annuity to
mimic a pension, " Hernandez says. " Some have living benefits,
with guarantees for a person and his spouse for the rest
of their lives. Those are good options, but advisers have to
be careful when recommending an annuity, because it can
be constrictive, and clients can lose flexibility and liquidity.
I rarely recommend putting a large chunk of money into an
annuity, but maybe some. "
If the participant is in poor health before retiring, this
calls for a different conversation, Foguth says. " In this case,
a [lower] life expectancy should be considered, " he says.
With a single person, " in some ways the conversation is
relatively black and white, " Hernandez says. " Advisers don't
have to discuss what happens to Social Security when a
spouse dies or consider what income sources a spouse adds
to the equation. "
For a married couple, any defined benefit (DB) plan income
or Social Security payments may decrease upon the death of
one member, so the survivor will probably need to make the
remaining money last longer, Hernandez says, noting that
one spouse will probably outlive the other. The one who is
left may have to downsize or move, or cut back on travel.
Readiness discussions will differ significantly, too, based
on the participant's generation, Amabile says. A Millennial
still has an opportunity to save his way into retirement
readiness; a Baby Boomer may have to temper spending or
retire later. She says assessing retirement readiness should
be done well before an employee contemplates retiring. " The
earlier people start planning for retirement, the more time
they have to make changes that can impact their future
plans, " she says.
" By understanding employees' current financial pain
points and providing education about retirement planning,
advisers can help these people plan for their future and
better manage their needs, " she says. -Rebecca Moore
NEXT STEPS
* Inform participants that, for an accurate estimate
of their retirement readiness-unlike what online
calculators provide-they should supply you with any
personal financial information that will affect their
total nest egg and their spending goals and needs once
retired; then schedule one-on-one sessions to help
them see where they stand.
* Conduct a session with each participant, if possible,
to review his information; discuss what he can do,
given this complete financial profile, plus opportunities
to save in the plan, to become retirement ready.
Project his monthly retirement income, based on his
available sources, and help him arrive at an optimal
plan for how to spend down savings.
* Prepare for each meeting by learning the participant's
generation and other pertinent demographics, to better
target his savings challenges.
44 | planadviser.com May-June 2019
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