By: David Macchia

ap_logo22Advisor Perspectives | December 6, 2021

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How can advisors help clients who lack sufficient savings for retirement – those who accept the need to take on risk to achieve capital growth, but insist on a minimum income to fund essential expenses?

In my two previous articles (here and here), I endeavored to frame the use of the systematic withdrawal plan (SWP) in the context of the needs of “constrained” investors. I asserted that an SWP works well for certain investors, i.e., “overfunded” investors.

After he read my articles, Bill Bengen, the inventor of the 4% rule, commented on my thesis. We exchanged a few additional comments. I believe Bill and I agree on an essential truth: An investor must remain consistent with the SWP strategy through every market condition that unfolds over a long period of time. If clients can remain invested, an SWP works well.

I’ve often said to advisors, “The best retirement income strategy is the one you can live with.”

My sole objection to an SWP, therefore, centers on the behavior dynamics of certain types of investors. My previous articles made several references to constrained investors. Now, I’d like to provide a framework that will help you identify those among your clients who fit the definition of constrained.

The first piece of good news is that constrained investors arrive at retirement with accumulated savings. At my firm, Wealth2k, we track the size of investments across thousands of income plans. In 2020, the average client’s asset accumulation was $1,080,000.

We see a common factor among constrained investors. In order for them to generate enough income to meet their essential lifestyle expenses, they must rely on their accumulated savings in order to produce a minimum monthly income. Because they have no “wiggle” room, or little or no tolerance for making investing mistakes, constrained investors’ chief investing priority is to mitigate risks over the course of retirement that can impair their ability to generate income. Otherwise, constrained investors face the possibility of a permanently depressed standard-of-living.

In planning for managing risks that can derail a constrained investor’s retirement security, the first one I think about is behavioral: keeping the client invested throughout retirement to give them the best possible chance of meeting the income plan’s targeted rates of return.

The next urgent task is to help constrained investors mitigate timing (or sequence-of-returns) risk. This is truly a big deal. In my earlier article, I explained how even a three-month difference in the timing of retirement can cost a client $1,000,000 or more in lost income.

An income strategy designed to encourage long-term investing consistency helps manage inflation risk. We can all agree that a segment of clients will spend an exceptionally long time in retirement, perhaps several decades. As I often state, “No retiree stops needing income.

An income plan that fails to plan for longevity risk may be perfectly fine for some clients, but not for constrained investors. Add to this the fact that women live longer than men. Considering that in fewer than 10 years, women will control the lion’s share of investment assets – as much as $30 trillion – it’s in the advisor’s interest to be mindful of the need to mitigate longevity risk. This is easily done by allocating a portion of the client’s assets to the purchase of an income annuity (a single-premium immediate or deferred-income annuity – SPIA or DIA) to buttress the “floor” component of the client’s overall income strategy.

The optimistic pessimist

I like to think of constrained investors as optimistic pessimists. They typically accept the premise of taking on risk to achieve capital growth in their investment portfolios. They understand that this is critical to generating inflation-adjusted income. Optimistically, therefore, they agree to have some of their savings invested in risky assets. However, constrained investors pessimistically (and urgently) express their need to have at least a portion of their monthly income guaranteed. To the advisor, they may communicate something like this:

I see the need to have my money at risk. I understand inflation, but for me to sleep at night, I need at least $7,500/month that I can count on no matter what. Can your plan do that? I just need to be certain that I’ll never run out of money to live on.

Most constrained investors will readily acknowledge that they have articulated conflicting objectives. On the one hand, they want income that grows as a result of investing their savings in risky assets. On the other hand, they want protection against risk in the form of an assurance that they will always be able to receive at least a pre-defined monthly income. The advisor’s challenge in designing an income strategy for constrained investors is to resolve these conflicting demands.



David Macchia is an author, retirement income industry entrepreneur and founder of Wealth2k, Inc. He is the developer of the widely used The Income for Life Model® as well as the recently introduced Women And Income™, the first retirement income solution developed for women investors.

Reproduced with permission from Advisor Perspectives, Inc. All rights reserved.