Select Language

Check Application Status

Resource Zone

Help your clients plan for their income in retirement

Clay Gillespie, CFP, CIM

Rate 1 Rate 2 Rate 3 Rate 4 Rate 5 0 Ratings Choose a rating
Please Login or Become A Member for additional features

Other formats

Audio 0:49:49

Note: Any content shared is only viewable to MDRT members.

Many of our clients are reaching the age when they need to start generating income from their retirement savings and pension entitlements. Gillespie discusses how you need to reframe the retirement discussion, talk the retirement language and develop the appropriate strategy to help your clients understand how much income they will have in retirement and how you plan on helping them achieve it.

Advising clients as they approach retirement is significantly different from dealing with clients who are accumulating assets. You need to start having a different discussion. Your clients will start to have different expectations as they now have different issues and concerns than they had while they were accumulating financial assets and working for a living. Getting to retirement was the objective; now you need to help your clients' transition into retirement.

I plan to discuss the risks of retirement and how to prepare your clients for this journey. Retirement is not a destination but a process that needs to be planned and monitored. It is very much like the fairy tales that we heard as children, which ended with marriage and living happily ever after. Of course, life usually gets much more interesting after marriage.

Retirement Is Not About Sitting on the Beach Looking at Sunsets. That Is Called a Vacation, Not Retirement

In my practice, I deal with clients who are retired or close to being retired. For marketing purposes, my number one prospect is someone five years from retirement, but my number one client is someone who is retired. Something happens to clients as they get closer to their actual retirement date. What they are worried about starts to change. They are more interested in knowing what their income will be in retirement and how to integrate their various investment assets, retirement savings, and pension entitlements. They are confused and worried as they approach retirement. You need to start discussing the language of retirement.

I will discuss my process and how I use it to answer the retirement risks that must be dealt with when designing a retirement income strategy.

At the same time, you need to help them understand that retirement is not just a financial transition but probably, and more importantly, an emotional transition.

The phrase I use with prospective clients: "You retire once, and I help people retire every day, so I've seen the good and the bad both emotionally and financially about retirement."

I spend a significant amount of time during the first meeting learning about the soft issues that concern them about retirement. It is important to stress that the concerns and confusion they have about retirement is quite normal and should be expected.

They've Never Retired Before

Have they considered what they're going to do in retirement? Have they considered retiring slowly? In our experience, many individuals have invested a great deal of time and energy in building their career. It was not just a job, but a lifestyle or even a passion. We typically suggest that if you can retire slowly, the long-term results are better. One of the main reasons behind retiring slowly is to allow them a chance to develop a retirement lifestyle before they officially fully retire.

If they can work two or three days a week, it would have two benefits. The first is that if they work only part-time, they will still get the satisfaction of work, but they will also start filling their free days with other activities. We find eventually that work starts getting in the way of those activities, making it a much easier transition into retirement. The second benefit is that they find work to be significantly less stressful as they are not involved nearly as much in company politics and decisions and are usually just doing the things that they've been good at and enjoy the most.

A common phrase I will use at this point:

When you are working, you might have had an activity such as golf to take your mind off work and to relieve stress, but when you retire and plan on golfing full-time, what are you going to do to take your mind off golf?" It is not golf that's important in this discussion; it's that they should start thinking of a retirement lifestyle. They need to have a reason to get up in the morning.

It is important in this first meeting for them to get an idea of some of the important emotional decisions they should make. As mentioned, during our working years we look to retirement as the destination, not as a journey. You now need to have them start planning for this next stage of their life.

The first two years of retirement are usually the two most expensive years of retirement. It is not until year three that we start having a better idea of what their retirement lifestyle will be. The first two years of retirement are usually used for pent-up demands, which will be satisfied during this two-year period, but eventually they will settle into a retirement lifestyle. This is the example I use to stress this point:

This is what will happen in your first two years of retirement. There are many items that you'll do that don't need to be done again, such as renovating your house, redoing your garden, or going on some worldwide trip that you will probably not repeat. It will take two years for you to start developing a retirement lifestyle, such as where you'll live May through September or whether you'll be home in the summer.

I am not sure what their retirement lifestyle will be, but if retirement goes well, your clients will settle into a pattern. They will develop a retirement lifestyle.

You can see here that we're spending a lot of time helping them develop what life will look like rather than on just the financial affairs. The financial affairs are important, but to develop the proper retirement income strategy we actually need to have an idea of how they're doing emotionally and what their lifestyle will look like before we can develop a proper plan for them.

So what we are some other emotional risks of retirement?

  1. Loss of identity
  2. Boredom
  3. No longer feeling of value
  4. A developing trend called "Grey Divorce" (There is now a spike of divorce around retirement.)

During the time a couple was working and raising their children, they had many other activities that they were doing. But as soon as they are empty nesters and no longer working, they find that they no longer have as much in common as they first thought and want to make a change. I've heard this referred to as a "late-stage midlife crisis."

Once those two years of pent-up demands are diminished, that is where we start seeing a loss of identity. For many individuals, their identity was what they did for a living, and now they've got to find a new identity. If not successful, they get bored or even depressed.

Retiring early seems like a lot of fun, but when you retire and you haven't developed a retirement lifestyle, and all your friends might still be working or have developed their own retirement lifestyle and are not around or are doing other things, there's not much to do.

The last emotional risk is the lack of a feeling of value. This really affects the major breadwinner in the family. Before retirement, breadwinners' lifestyle, and the financial success of their family, was based upon their intellectual and/or physical capital, but when they are retired these are no longer required. Yes, they saved the money to get to this point, but their intellectual or physical capital is no longer required in order for them to maintain their lifestyle. And although this was their objective during all those years, this leads to their no longer feeling of value. There is also a feeling of a lack of control, which does cause problems on the financial side as sometimes they want to get more actively involved in the process rather than let the process work for them.

Financial Risks

I will now go through the major financial risks that your clients will face in retirement and how to explain each to my clients and prospects:

  • Longevity risk
  • Inflation risk
  • Market volatility
  • Withdrawal rate risk
  • Mental capacity and estate planning risks
  • Health risk

As you take your clients through the retirement process, you will want to start educating them on the risks of retirement that may be different than they were during their accumulation years.

It is important to remember when you talk about financial risks that your clients are really now interested more in income dependability and maintaining their standard of living.

Longevity Risk

Longevity risk is the risk of outliving your money. At the heart of this problem is life expectancy. Life expectancy is one of the most misunderstood aspects of retirement income planning, yet it is one of the most important factors.

Most people assume that life expectancy is the same as life span. This is not correct. Instead, life expectancy is a median number of years—such that 50 percent of a particular age group will die before this number of years, and the other 50 percent will die after this period. The numbers I'm going to give are the Canadian life expectancy numbers, but you'll see the same type of results when looking at your own country's life expectancy probabilities.

For example, a male 65 years of age today has a life expectancy of 19 years; this means that he is expected to live until age 84. Unfortunately, this is a number that many individuals use when planning their retirement. By using this number you'd be wrong 50 percent of the time—not a great strategy.

There is, however, a 50 percent chance that he will live longer than 19 years; interestingly, there is also a 30 percent chance that he will see his ninetieth birthday.

A female who is 65 years of age today is expected to live for another 21.5 years. She is expected to live till she is 86.5 years of age. But she also has a 50 percent chance of living longer than her life expectancy. And there's a 41 percent chance that she will see her ninetieth birthday.

Even more interesting is the result for a couple, both age 65. In this case, there is a 58 percent chance that one of the two will survive to see his or her ninetieth birthday. There's a 30 percent chance that one of the couple will reach age 95 and a 10 percent chance that one of the couple reach age 100. Thus, when you are planning retirement for your clients, life expectancy is not the appropriate number.

Inflation Risk

Inflation risk is just realizing that things will cost more next year then they do this year. Thus, in planning you have to make sure that your clients realize that they need to plan for some type of inflation to maintain their standard of living over their lifetime. For example, if the inflation rate is 4 percent, then you would need an income of $109,556 in 20 years' time to buy the same basket of goods that you could buy today for $50,000.

Unfortunately, the common mistake many individuals make as they approach retirement is to say, "My life expectancy is 20 years, and I have saved $800,000, which means I should safely be able to generate at least $40,000 in income. But of course when you run the numbers in an after-inflation environment, it would be nowhere near this number. This is just part of the education process.

Market Volatility

Market volatility is simply making sure that you have the appropriate asset allocation strategy for your clients when in retirement. This risk, of course, was there when they were accumulating assets but is even more problematic when they are de-accumulating assets. You need to be extra careful to make sure that you get this right, because if they make dramatic changes to their asset allocation at the wrong time it, will have lifetime ramifications as they are no longer working and cannot out-save this mistake by working longer. This whole concept of market volatility and having the appropriate asset allocation for your clients is not just a return metric—you also need to deal with investor behavior.

You would think that, given that the average investor seeks the best-performing investments to suit his or her situation, the average investor should be able to achieve at least the average investment return. Many studies have suggested that is not true—such as the annual Dalbar study.

The answer is quite simple. It all comes down to investor behavior; investors do not always make the most rational decisions.

Withdrawal Rate Risk

I think it is useful to look at a couple of examples before going into withdrawal rate risk or, as it is commonly called, sequence of return risk. Let's look at three fictional portfolios to illustrate the problem. All three of these portfolios have an average annual yield of 7 percent per year.

Accumulation Math
  1 2 3 4 5 6 7 8 9 10 Annual Return
A 7 7 7 7 7 7 7 7 7 7 7%
B 9.4 14 13 23 -4 10 -1 21 -4 -7 7%
C -7 -4 21 -1 10 -4 23 13 14 9.4 7%

If you invested $100,000 into portfolio A, you would have $196,715 in 10 years. But how much would you have if you invested in portfolio B? Again, you would have $196,715. And, lastly, in portfolio C? Again, you would have $196,715 in 10 years.

Withdrawal Math

When accumulating money, just making sure you deal with the proper asset allocation in your diversification strategy to make sure they can handle the risk in the portfolio is usually sufficient. Stock market corrections, when you are accumulating funds, can actually increase the long-term value of their portfolio. But in retirement, your clients need to be prepared for a stock market correction every single day.

Let's now look at these three fictional portfolios and see how they react when you are redeeming funds annually. We know they earn, on average, 7 percent per year, so let's assume we withdraw $7,000 a year and see what happens to the ending values of the portfolios.

In Portfolio A, you would earn $7,000 in year one and withdraw $7,000 in year one. Then, in year two, you would earn $7,000 and then withdraw $7,000, etc. Thus, at the end of 10 years, you would still have $100,000. This makes sense because you earn $7,000 a year, and you redeem $7,000 a year.

Let's analyze Portfolio B. In year one, you earn $9,400 and only redeem $7,000; in year two, you earn 14 percent but only redeem $7,000, etc. Do you think after 10 years it is higher or lower than Portfolio A?

Remember, they have the same annualized compound return of 7 percent and thus, if you redeem 7 percent and on average earn 7 percent, then you should maintain your capital. So, do you think the ending value was the same as Portfolio A or higher or lower? Well, it is higher—actually significantly higher at $111,882.

If you look closely at Portfolio C, you see it is actually the same as Portfolio B, but the returns are reversed. So if you redeem $7,000 a year from Portfolio C, is the value higher or lower than Portfolio A? It is significantly lower at $83,150.

  1 2 3 4 5 6 7 8 9 10 Value
A 7 7 7 7 7 7 7 7 7 7 $100,000
B 9.4 14 13 23 -4 10 -1 21 -4 -7 $111,582
C -7 -4 21 -1 10 -4 23 13 14 9.4 $83,150

I know this is a simple example, but you want to use an example that you can explain to your clients and get them comfortable that how and when they withdraw money is significantly more important than it was when you were adding money to a portfolio.

Mental Capacity and Estate Planning Risks

I'm not going to spend a lot of time on this risk, but in my practice, the mental capacity of my clients as they age is a growing concern. It is important that you have a discussion with your clients and make sure they are prepared for this highly probable event. In these discussions, it is important to make sure the whole family is involved in understanding what you're doing and why you're doing it.

I sometimes use a family meeting to discuss these options so everyone is on the same page, and they know that the decisions were your client's decisions. If a family member is upset, mom and dad are still around to explain their rationale. If mom or dad is not around, then the child will believe or say, "This is not really want mom meant." You want to explain to your clients that you want to deal with these issues while they are alive and capable to avoid starting a war among their children after their death or mental incapacity.

Health Risk

You need to help your client plan for a possible increase in the cost of health care as they age. You will find that this issue is top of mind for many of your clients in retirement.

So far we've discussed some of the emotional issues that your clients need to grapple with in retirement and some of the major financial risks that clients will need to deal with in retirement. At this point, I'm going to go through some of the strategies I use when dealing with retired clients.


I discussed earlier that the first meeting is used to get a better feel for the clients and to start educating them on the various risks in areas that need to be considered when planning their retirement journey. At the end of the first meeting, I will send them home with a questionnaire or, in many cases, I email them a PDF fillable questionnaire for them to complete. I usually spend the first meeting getting to know more about them personally and having them think about some of the risks they need to be concerned about in retirement. I'll spend time talking about their children, their estates, and what their plans are for retirement, but I spend very little time discussing actual financial details. The financial data is what it will be and is not left up to interpretation. And I get better answers when they can go home and look up exact figures rather than give me rounded off numbers in the meeting.

At this point, I will quote them a fee to prepare a financial plan. The main concern they typically have at this point is how much income can they generate (after tax and after inflation) for their expected lifetime). You need to answer this question as this tends to be the burning issue and why they need the guidance.

The fee is just to develop a plan and strategy to their retirement, not for implementation. I tell them that they are free to implement the plan with anyone. Implementation is a separate engagement. I find this strategy has the following benefits:

  • I find if you give your prospects a chance to say no, there is a better chance of them saying yes. Today's prospects don't like the feeling they are being sold; they want advice.
  • Since you are not asking them to implement and you are just doing the plan, they get to see your advice, and there is a better chance of them accepting the recommendations since they paid for the advice.
  • You also differentiate because many of your competition will not charge a fee, and the prospects know that the only way they are going to make any money is for them to make a sale.
  • Lastly, you get to prequalify your prospects. If they are not willing to pay a fee to plan their retirement, they are probably not very good long-term clients, and you would probably be wasting your time dealing with them.

You need to look at it from their perspective. They may have retirement savings, company pensions, government pensions, and personal savings, and they need you to translate that into a lifestyle number. The phrase I always use at this point is, "You really don't care how much money you have; what you care about is what it can buy you. It is about maintaining a lifestyle."

Near the end of the first meeting, I use the following phrase and will come back to it many times during the planning process and implementation stage: "Over a typical 10-year period based on investment returns, you're going to love us twice, hate us twice, and be indifferent to us six times. What this actually means is that over a 10-year period, the market typically goes up dramatically twice (the years you love us), goes down dramatically twice (the years you hate us), and six of the 10 times you get an average return, and that's when you think we are doing an OK job. Thus, you need to have a strategy to deal with typically widely varying investment results."

When coming in to their review meetings, I have clients asking whether they love or hate me this year. I explain the strategy and what we are going to do when each of these events occur. The clients know what we are going to do before I tell them, if I have educated them properly.

It is about building expectations and having them understand the strategy that is important, and that you have a plan for all possible market conditions. You need to make them feel prepared.

Most of my clients will need to use all or most of their investment assets to maintain their current lifestyle through their retirement years. One of the strategies I commonly see that concerns me is when the strategy is based solely on the yield on the investment or the income that an investment product can generate without the concern about the principal. What happens when the clients need additional income to maintain their income, but their capital has decreased? What do you do for them then?

Currently, interest rates are historically low, so it is difficult to depend only on fixed income investments. Thus, many retirees need to start using equity-based investments in the retirement portfolio in order to produce their desired income.

In a properly diversified portfolio, you should be able to minimize the risk of stock market volatility while they are accumulating assets, but this diversification strategy may not be enough to minimize the risk once you start generating retirement income from these accumulated savings.

One of the major issues about generating income from a diversified portfolio is that they will, from time to time, be taking an income from their portfolio in years when the stock market is performing badly, thus depleting their capital, or else they will be forced to reduce their income to maintain their capital. These are the years they hate me. Therefore, to make the most effective use of their retirement income resources we suggest:

Step 1: Develop an Investment Policy Statement (IPS) that captures their unique goals and objectives along with their risk tolerance. Typically, this is a detailed, two-page document that sets out exactly how their account will be managed given their personal constraints.

Step 2: Have a tailor-made and detailed retirement income illustration created. This illustration should be based on the results of the IPS information, along with a detailed analysis of their situation. This will allow them to estimate how much income they can generate from their investment assets and pension entitlements. This retirement income illustration should be able to report an after-tax and after-inflation income (net spendable income) for the rest of their expected lifetime.

When estimating your life expectancy, add at least five or ten years to your number. This is because life expectancy is a median number (i.e., half the people of every given age die before this date, and half the people die after this date as discussed earlier).

This personalized retirement illustration should be rerun every two years as assumptions will change, and their lifestyle wishes may also vary over time. If you redo this illustration every few years, then you should never go too far off your planned course.

Step 3: Design a tailor-made investment strategy that will allow them to generate an income through their retirement years.

When they were working and accumulating retirement savings, stock market volatility was not a concern as long as their portfolio was properly diversified. One of the greatest risks in retirement planning, however, is having the stock market drop substantially just before or just after they retire. Proper diversification techniques do not always help in retirement.

In generating an income during retirement, it is important to not withdraw funds from an asset class that is declining in value. If your clients are unlucky enough to retire when the stock market is performing poorly (and they need to generate income from their portfolio), then they could deplete their capital at an alarming rate, ultimately reducing the chances that their portfolio will be able to generate their required net spendable income throughout their remaining retirement years.

Many studies have suggested that you should not have an initial withdrawal rate higher than 4 percent. In my opinion, with proper retirement income strategies, an initial withdrawal rate of up to 5.5 percent is sustainable. Thus, we recommend the following strategy:

  • Invest one year's income in a money market account that will be used for the first year's income.
  • Invest one year's income in a 1-year bond or CD.
  • Invest one year's income in a 2-year bond or CD.

It is important that you own the fixed income (bond or CD) directly as you do not want the current market to influence them, and thus, you will know how much they will be worth at a specific time at a future date. A bond fund or mortgage fund is not suitable for this purpose because both of them can fluctuate with changes in interest rates. As interest rates rise, bond and mortgage fund market values decline.

Invest the balance of their investments in a growth portfolio based on the results of their personal Investment Policy Statement (IPS).

How Does This Strategy Work?

I use the following graphic to visually describe the strategy. [visual] I will use their numbers at the planning stage, and I often use this graphic earlier in the planning stage to spend more time up front to demonstrate our value and how we are different.

The rationale behind this strategy is that the money market account will deplete itself over the first year. After the first year, if the growth part of the account has grown in value (the years they think I did OK), then you take the following year's income from the growth portion (i.e., you use some of the growth part of the account to replenish the money market fund). If, however, the stock market performs poorly and the growth account decreases in value (the years they hate me), then you use the maturing CD or bond (maturity value is known) to replenish the money market fund. If the GIC is not used for income, it will be reinvested for a guaranteed period of two years.

This strategy means that unless we have stock market decline that lasts over three years, they should not be forced to take income from their investments while they are declining in value. Thus, when the stock market is declining, they have some comfort in the knowledge that they will not be digging into the capital (for at least three years), and hopefully they will have enough fixed income investments to weather the storm.

This strategy only works because they avoid taking income from any part of their portfolio that is declining in value. The whole rationale for this strategy is to increase the life span of their portfolio.

When Should I Implement This Strategy?

One of the greatest risks involved in retirement income planning is the risk of the stock market correcting (dropping) right before or right after your clients retire.

Their portfolio should be aligned with their retirement objectives at least five years before their retirement date. Thus, five years before retirement, they should have at least two to three years' worth of their desired retirement income in a fixed income vehicle that will mature the day they retire.

Thus, if the stock market is performing poorly (five years before retirement), then they will have at least five years to let the stock market grow before having to take money from their portfolio to generate income.

The portfolio must be monitored each year as they must also decide whether to take the following year's income from the fixed income portion of their account or from the growth portion of their account. In the years when the market earns extraordinary returns, not only should they use this growth for income purposes, but they should also take additional funds from the growth account to add to the fixed income portion of their account, thus rebalancing their portfolio.

Interest Rates Are Low. Is There Still a Place for Fixed Rate Immediate Annuities?

One of the major risks in retirement is your clients living too long. In today's market, I use a lot of fixed immediate annuities when clients reach 75 years of age to deal with the problem of longevity risk. Once they get to this age, the payment is made up of approximately 75 percent mortality credits (mostly their age) and only 25 percent interest rate. Thus, interest rates are not that important to the monthly income as when they are younger. When I discuss annuities, I call them a personal pension. In the press, pensions are deemed to be good and annuities are deemed to be bad when they are actually the same thing.

None of us knows how long we are going to live, but using some of your clients' investments to purchase a life annuity (a pension) might make sense even at these low interest rates to ensure that your clients do not run out of funds.

Ongoing Monitoring

It is also important to start educating your clients about how their account is monitored or benchmarked. They will get a quarterly performance report (after fees), which we benchmark against the same assumptions we used during the financial planning process. If I use an index as a benchmark, it is not as useful. If the stock market goes down 20 percent and they only go down 5 percent, that might seem like a good result, but they may still be behind the return that they need to make to meet their objectives.

In the planning process, I use a real rate-of-return benchmark (return above inflation) because it is more predictable over time than the nominal rate of return. I use the following example: The real rate of return is the return once the effect of inflation has been removed. For example, if the actual rate of return were 5 percent and the inflation rate were 2 percent, then the real rate of return would be 3 percent. Furthermore, this is the only number that appears to be somewhat predictable over time.

The purchasing power of one dollar today will likely be significantly different from its purchasing power in future years. Using the real rate of return in our illustrations allows us to make reasonable predictions on what standard of living our clients can maintain during their retirement years. While the actual rate of return (investment growth rate) and the inflation rate are impossible to predict, the difference between these two numbers is more static.

How Much Can I Withdraw?

A discussion that is quite interesting is what your clients' initial withdrawal should be? The first study by William Bengen suggested that the initial withdrawal rate can be no higher than 4 percent. Further studies have suggested that the initial withdrawal rate should be even lower with expected returns in the future expected to be lower.

These are very important studies as they put some analytical analysis behind the sequence of return and the withdrawal math problem.

The main issues I have with these studies is that they assume there is nothing you can do along the way to change the results and, more importantly, they assume that all retired clients need their income to increase every year with the rate of inflation.

You can see from the strategy I use in my practice that I believe you can reduce the effect of a market downturn by having an income strategy to deal with this volatility of returns. You do not just assume there is nothing you can do to reduce the effects of volatility of the stock market over time.

In addition, we do not automatically increase clients' income every year. We increase their income when they need additional income, not just because the illustrations suggest you should. Their income is monitored and adjusted as required, and we find that we typically only increase their income every three or four years.

We also find that clients' income needs to diminish over time. The first 10 years tend to be more expensive than the next 10 years. The only place the income needs tend to increase later in life is because of long-term care needs. That is why you need a strategy to deal with possible long-term needs. There was recent study done by David Blanchett that goes into more details about this topic.

I have seen this referred to as the three stages of retirement:

Stage 1: the Go–Go stage

Stage 2: the Slow–Go stage

State 3: the No-Go stage

I am worried that we may be using some of these illustrations and research to the detriment of our clients by not letting them spend money when they are more healthy and active in the Go-Go stage. Our job is to help our clients maintain their desired income through all the stages of retirement. I use the phrase with my clients, "I don't know how healthy you will be in 10 years' time, but you are probably healthier and more active today."


It is your job to make sure your clients don't run out of money. They need to be set to deal with the emotional side of retirement to make good financial decisions. They have never retired before, and they need reassurance and acknowledgment that it is OK to be confused and concerned. You want to guide them through what retirement will look like so they can visualize it and start to prepare for it emotionally.

Once they start to get a handle on retirement, you need to tell them how much they can spend every year and not run out of money. They need this number so they can plan their retirement lifestyle.

You need to have a strategy that allows your clients to have peace of mind so they understand that the market will go up and the market will go down, but that your strategy has considered these expected outcomes, and they know what you are going to do during these times. The more you prepare your clients for these outcomes, and the more they understand, the happier your clients will be. Clients hate surprises. Always give them the bad news before the bad news happens, and then when it happens, it is no big deal.

Lastly, ongoing monitoring to update your clients and reinforcing the strategy is imperative for long-term success for you and your clients.

Clay Gillespie, CFP, CIM, is a 16-year MDRT member with one Court of the Table and 13 Top of the Table honors from Vancouver, British Columbia, Canada. He is managing director of Rogers Group Financial, where he specializes in retirement income planning, effective income generation in retirement and associated estate planning issues.


{{GetTotalComments()}} Comments

Please Login or Become A Member to add comments