Many advisers focus on Return on Investment (ROI) when planning for their clients’ retirement with the goal of helping them accumulate a certain amount of funds by the time they retire. The “magic number” is often determined using different “rules of thumb.” For example, it’s frequently calculated as either 20 times a desired annual income or 300 times a desired monthly income. This approach is overly simplistic and misleading, yet among baby boomer clients such formulaic thinking is still prevalent.

Such an “accumulation only” strategy should rightfully be thought of as the “cross your fingers” strategy. Your clients’ lifetime income remains dependent upon the markets and their portfoloios continuing to perform well over-time. Yet as William Bengen's 2013 Sequence of Returns Study has shown us, if a market downturn occurs at the start of a couple’s retirement, it can be devastating to their long-term plans. For example, if they are lucky enough to have their retirement coincide with positive return years for the markets, they not only would get annual income increases but may have a substantial sum leftover after 20 years. Conversely, if the market turns negative shortly after they retire, that same couple could run out of money after 14 years.

The beauty of an annuity

As a retirement income adviser, I strongly urge you to introduce your clients to a new way of defining ROI that I like to call “Reliability of Income.” With this goal in mind, you can help your clients lock in a guaranteed income for life by encouraging them to purchase income insurance in the form of a fixed or variable annuity.

Annuities provided your retired clients with a lifetime base income that is not dependent on how well the markets perform. When this base is combined with their Social Security payout it will contribute to true income reliability. It will also give you, their adviser, the opportunity to present other recommendations that may be more opportunistic in nature. And you can also apply this strategy to engage in multi-generational investing for your more affluent clients, since right now their investment horizons are frequently limited by their own retirement timeline to the detriment of their heirs.

Regardless of how wealthy they are, once a couple is confident that their ROI-based plan will provide them with sufficient income, they become free to invest their remaining assets in a manner that is more consistent with the time horizons of their children and other heirs. By redefining ROI and helping your clients rethink their approach to investing, you’ll be giving them and their heirs a lifetime of income security.

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Randy L. Scritchfield

Randy L. Scritchfield

Scritchfield, CFP, LUTCF is President of Montgomery Financial Group, which was established to reflect his personal philosophies about the delivery of financial services to the public.