For centuries, academics and professionals have strived to enhance the knowledge of their discipline. They have created and then reinvented state-of-the-art thinking on retirement planning. Each iteration of their activity has yielded better understanding, deeper insight, and in some cases "a better mousetrap." Several of those valuable insights are shared here by experts associated with The American College.
How much savings are needed for retirement?
For years the traditional approach to retirement planning has been to calculate the amount of savings needed for retirement by using software that relies on a static retirement for clients (expenses remain the same, except for inflation, throughout the retirement period). However, retirement is a dynamic, not static, part of the lifecycle. Somnath Basu of California Lutheran University suggests a better way to answer the "how much" question with his age-banding model. The unique approach he proposes is two-pronged. Planners need to segregate retirement expenses into different categories and then adjust expenditures for each category over specified periods of time called "age-bands." The premise is both intuitive and brilliant. Do we really spend the same on leisure when we are aged 60 as when we are 80? Isn’t there a disparity in spending over time for taxes and other categories of expenses? Dr. Basu’s model allows the planner to account for these issues. In addition, his better mousetrap can account for inflation on the different categories of expenses unlike many of the current models being used today. After all, we know health care expenses inflate at a different rate than other living expenses. By unbundling expenses and looking at different stages in the retirement lifecycle we are better able to predict the actual costs associated with retirement. Most importantly, the more accurate our assessment of costs, the better our estimate will be for the assessment of savings needed for these costs.
How can we motivate clients to save?
It is common practice to try and encourage people to save for retirement by demonstrating to them the enormity of their obligation. Popular press and planners alike keep bombarding consumers about how far behind they are – "the train left the station a while back and you need to catch up." Dr. Josh Weiner of Oklahoma State University points out that presenting your client with such a daunting task is more likely to discourage than motivate the desired behavior of saving more for retirement. Dr. Weiner suggests:
What strategies can be used to best plan required minimum distributions for non-spousal beneficiaries?
Many planners know how to navigate the required minimum distribution minefield. However, April Caudill, the Director of Advanced Marketing for Prudential Financial in Plymouth, Minnesota, and the former manager of National Underwriter’s Tax Facts, suggests a separate set of rules and spells out some strategies that can avoid the adverse tax consequences for younger beneficiaries. One method is to establish separate accounts by December 31 of the year following the death of the participant. In this manner, the life expectancy can be used for each separate account and the beneficiaries can invest differently than if the accounts were not separated. Other ideas to consider include using trusts as beneficiaries, establishing separate IRAs and using a master trust. There are different merits for choosing one option over another that are discussed and debated. The combination of content from state of the art articles, and the insight from professional analysis, just might provide the better mousetrap for deciding the strategy that will work best for your clients.
To learn more about the topics discussed here and delve more deeply into innovative retirement planning ideas, you can utilize the resources at The American College's New York Life Center for Retirement Income that include the Center's book, Making the Retirement Secure: Innovative Concepts for Financial Advisors, and its online series of videos on the following topics:
Visit in person or online (go to TheAmericanCollege.edu and click on the retirement center). And remember: ultimately, the better mousetrap is the one that will work best for your clients. Kenn Tacchino is the Director of the New York Life Center for Retirement income at The American College. Kenn is an adjunct professor and leading expert in the area of retirement planning. Kenn can be reached at: Kenn.Tacchino@TheAmericanCollege.edu.