Retirement income planning is an emerging business for many advisors, and technology is catching up, giving them the ability to handle very complex client decumulation scenarios in a tech-supported experience very similar to the way they’ve managed their clients’ accumulation.
According to a panel of decumulation experts at the BNY Mellon Pershing INSITE 2024 conference, held last week in Nashville, Tenn., the development of software to make that easier for advisors has arrived just in the nick of time, as there’s an estimated 4.1 million Americans retiring each year through 2027.
Panel moderator Renee Long, senior director of retirement solutions at BNY Mellon Pershing, said mass-affluent and high-net-worth clients tend to go through three prominent inflection points with their retirement planning, beginning with participating in an employer’s retirement plan. It’s the other two phases where advisors can add a lot of value.
“The second big one is when they’re rolling that money from a 401(k) or other defined contribution scheme into an IRA, and there are considerations there,” she said. “And the third is their decumulation. How do I make that money last 20, 30 years? What are the capital preservation strategies I should employ, and how should I be thinking about spend-down and tax planning?”
Long was joined by Joseph Szalay, senior vice president and product strategist at PIMCO; Jay Charles, director of annuity products at Luma Financial Technologies; Manish Malhotra, founder and CEO at Income Discovery; and Mike Barry, managing partner at Quorum Private Wealth.
Currently, advisors are still somewhat protected from major competition when it comes to taking control of 401(k) assets through a rollover, Szalay said.
“We’ve done such a great job of accumulation, things like auto-enrollment, auto-escalation. We have a great way to get the masses in and saving,” he said. “That doesn’t compute or translate when you get to the decumulation phase.”
The primary reason has been the simple fact that all the systems have been set up for collecting and holding client dollars, not for sending it back out again except in a lump sum as an IRA rollover. Replicating the “paycheck experience” after retirement, which is what clients want, has been very challenging.
“There are middle-ware providers that are looking to improve that, but it’s still a very big headwind getting any type of systematic distribution set up in these plans,” he said. “Another reason is there are some limitations as far as what platforms these are available on. That gives the plan sponsors a lot of hesitation because if they want to change providers in the future, they may not be able to port their distribution provider over to the new plan.”
Those hurdles are giving advisors some time to make more of their decumulation skills, especially for clients who are ultra-wealthy. The merely mass-affluent or high-net-worth client has fewer moving parts when it comes to assets. Once a client is dealing with multiple deferred compensation plans from multiple employers, with various buckets of stock options and the like, figuring out the best plan and then executing it over time can be daunting.
But, hey, there’s an app for that.
Complexity Requires Technology
Malhotra used his own company’s tool as an example of what’s possible in decumulation in 2024. This is one area, he said, where the independent RIA, which can be flexible in its purchase of technology, has a leg up on advisors confined to their home-office offerings.
“You’ve had your portfolio management system, which took an allocation that you have for the client and automatically runs that—rebalance, trade, tax-loss harvesting, tax-efficient, capital-gains minimizing trading. Now step back and think of the client in retirement,” he said. “They have a set of expenses, $120,000 of living expenses, $20,000 in Medicare for medical expenses, with different inflation adjustments, Social Security starting in a few years, pension, rent, etc.”
What most advisors do, he said, is use their planning tool each year to figure the details out. At best, it’s time-consuming. At worst, it’s missing some of the benefits of technology, he said, because in the mix are deferred compensation accounts, qualified accounts, taxable accounts, Roth accounts, the cash value of life insurance and annuity payments. And at the end of the day, it’s not what a client has that matters as much as what a client keeps.
“All of them interact together to determine the client’s taxes,” Malhotra said. “Most planning tools today do not offer a dynamic, tax-optimal withdrawal strategy.”
Income Discovery’s Paycheck in Retirement tool, he said, is one of the systems that now can take the client’s cash-flow needs and a targeted tax rate (he used 22% as an example) and run a decumulation plan similar to the way accumulation was run—seamlessly, with the click of a mouse.
“So many dollars will come from the qualified plan, so many from a different comp plan, so many will come from the taxable account,” he said, adding that minimizing capital gains becomes a priority at that point. “The industry today still manually runs that distribution. This is why it’s way more onerous to manage distribution for your client compared to just managing their portfolio.”
Guaranteed Versus Non-Guaranteed Strategies
For clients with less complex retirement scenarios, the primary consideration, even before taxes, is ensuring that assets will last as long as they need to.
“Annuities, especially for the mass affluent, have been a fantastic vehicle in financial planning and retirement plans to help protect income through retirement,” said Luma’s Charles. “Fee-based annuities have become much more powerful instruments that you can incorporate right next to managed accounts and other fee-based products.”
Fixed-index annuities, for example, allow advisors to fully protect a portion of a retiree’s assets and provide guaranteed income, and that allows the advisor to take more risk with other parts of the portfolio to ensure growth, he said.
On the non-guaranteed side, Szalay said, there’s much more demand for income-producing strategies, which have a few benefits in the decumulation phase.
“One is they’re really easy for people to understand in the context of their spending,” he said, adding that figuring out whether clients want to spend down their balance, maintain it or grow it is an easier decision than figuring out how much money they need. “By using an income-producing strategy, you have that bellwether right in front of you to say, ‘This is how much income we’re producing,’ and you try to tie your spending to that number.”
Another benefit is the longevity that’s achieved by using an income-producing strategy, Szalay concluded.
“It’s a simple way for people to be able to spend, and they have 100% of the balance to work with. It’s flexible, and they can spend more or less if needed.”