How to Have The Accumulation And Decumulation Conversations With Clients
In many cases, clients, and their advisors for that matter, believe the most important conversations they have involve goal-setting, planning and strategizing. In other words, accumulation. Clients spend years, perhaps even their entire working lives, accumulating assets with the goal of having a comfortable retirement.
Conventional wisdom often dictates that accumulation is the hard part. As an advisor, you've probably had numerous conversations with clients where the client identifies a specific dollar amount that they'd like to retire with. A popular figure is $1 million. So an advisor has a 30-year old client that currently makes $125,000 a year and wants to retire with $1 million in 35 years.
From there, advisor and client will discuss strategies for accumulating/building
wealth while addressing issues such as expected income increases, home buying, drawdowns during bear markets, saving for college if children are part of the picture and long-term care insurance, among other issues. With all those life planning issues to consider
, accumulation conversations can be daunting for both clients and advisors.
However, the decumulation conversation can be even more difficult. Various academic studies suggest that many retirees are not sure what to do with the assets they've amassed over the course of their careers. A study published earlier this year by Suzanne Shu, Associate Professor at UCLA’s Anderson School of Management, indicates that decumulation is a tough issue to solve and that advisors cannot offer one-size-fits-all solutions
In other words, the decumulation conversation is the perfect time for advisors to reconnect with clients and prove their value by offering strategies beyond simply telling clients to make the required 4 percent withdrawals.
The seismic demographic shifts already underway in the U.S. confirm that the decumulation conversation is not just vital to have with clients, but also represents significant opportunity for advisors.
“The soaring number of Baby Boomers entering and approaching retirement is leading to a major shift in focus from accumulation and retirement savings to decumulation and retirement income,” according to BlackRock
. “This demographic “tipping point” already occurred in 2013/2014 with assets leaving 401(k) plans exceeding assets being contributed or entering plans. This trend is expected to remain until 2030, peaking at $40 billion annually in 2019.”
Other data points confirm that now is the right time for advisors to be engaging clients on decumulation and to be prospecting for new clients that are near or just starting retirement.
“There couldn’t be a better time to better serve this segment, as it accounts for an increasing amount of business,” according to Accenture
. “The number of Americans aged 65 and older is projected to nearly double, from 52 million in 2018 to 95 million by 2060.”
A solid starting point for advisors to engage clients on decumulation is on spending habits, which speaks to life planning, and measure those tendencies against the retiree's assets. The Bureau of Labor Statistics estimates retirees in the U.S. have annual expenditures of $45,000 to $46,000.
Various studies and data indicate that the bulk of U.S. retirees are prudent and spend inline with their incomes. That presents advisors with a chance to engage if life planning strategies that can help clients reduce costs in their daily lives and retain even more of that income. And while spending often declines the deeper into retirement clients move, many are still worried about having adequate retirement savings or decumulating too quickly.
“A BlackRock survey found that only 36% of Americans are confident they will have the income they need in retirement—while 55% are concerned about outliving their savings in retirement,” according to the asset manager.
Bottom line: decumulation is an emotional issue that, in some cases, causes clients to become fearful of what's next. Through careful planning and guidance, advisors can enhance trust and properly guide clients through the decumulation chapter of their lives.
Related: Why Complex Portfolio Construction Doesn’t Benefit Clients