Guiding the Transition From Accumulation to Income

Feb 2, 2021 Share This 

Bridging_Accumulation_to_IncomeYou’ve listened to their goals, assessed their risk tolerance, calculated their earning potential, and tailored your client’s portfolio in stride.

But then what?

Many advisors place an incredible amount of emphasis on helping clients accumulate wealth, and rightfully so. What may be lacking, however, is a plan to help those same clients transition from the accumulation phase to the income phase where they get to reap the benefits of all those years of planning.

During the five years leading into retirement, sometimes referred to as the “Danger Zone,” it’s important to discuss the following areas. It’s also an important time to consider potential adjustments to help ensure your clients can transition to their golden years smoothly and that there’s a solid plan for guaranteed income that lasts the rest of their lives.

Maximize Social Security

The prospect of leaving the workforce and claiming Social Security benefits before full retirement age is tempting for many. But it’s important to discuss the possibility of delaying Social Security benefits for as long as possible, especially for those who may be facing a shortfall. That’s because delaying Social Security until age 70 has the potential to arguably provide much greater returns than any other investment in their portfolio.

How? According to the Social Security Administration, someone who claims benefits at age 62 and receives $716 per month could receive $1,266 per month if they wait until age 70 — a 76% increase in benefits!1 What other retirement strategy could garner those kinds of returns over an eight year period that are guaranteed for life?

Estimate Living Expenses

Each year, the Bureau of Labor Statistics releases studies outlining the average living expenses for Americans in various age demographics. The latest data shows that those ages 65-74 will spend an average of about $55,000 each year.2 Compare that with the average annual Social Security benefit of just over $18,000 and the disparity becomes apparent.3 That gap will need to be met with other income sources.

It’s surprising how many individuals don’t follow a budget but, as retirement approaches, it’s prudent to encourage your clients to get something down on paper. Which expenses might go up or down in retirement? What about the mortgage, car payments, travel, and those all-important medical costs? It’s also critical to consider inflation and its role. For example, assuming an annual inflation rate of 2%, a $500 monthly expense this year could cost more than $600 in 10 years — a 20% overall increase. Will their withdrawal rate be sustainable and support those kinds of projections?

When a retiree’s current and projected future living expenses are exposed in black and white, it sheds light on where they may need to rein in spending, consider catch-up contributions, or refocus some of their investment dollars.

Assess Risk Tolerance

Leading into retirement is typically when investors are at their wealthiest and also most vulnerable to large downturns in the market. Many are less willing to stomach a market drop because there’s less time to recover those locked-in losses.

Income withdrawals during a market downturn have the potential to prematurely deplete a portfolio before the market rebounds due to sequence of returns risk. Losses combined with income withdrawals typically diminishes a portfolio’s value early on, meaning it may not last as long as originally planned.

That’s why clients in these formidable years will likely want to shy away from high-risk equities and focus instead on preservation. Work with your client to reassess their portfolio allocations to ensure they match up with their current retirement goals and risk tolerance, and look for ways to fill in any potential shortfalls.

Explore the Role of Annuities

There may be gaps that need filling once a client estimates their Social Security benefits, dividends and other sources of retirement income. In the five years leading up to retirement, however, there’s little time remaining to pivot investment strategies to make up significant shortfalls.

Guaranteed income from an annuity may be appealing in these circumstances, and may help minimize the longevity risk of running out of money. While there are many types of annuities, some are more suited to those facing a potential shortfall later in life. Income annuity products may help clients create their own pension, allowing them to benefit from market growth while placing a limit on losses. These annuities offer flexible payment types that are designed according to a client’s goals, and also protect beneficiaries.

Of course, financial wellbeing isn’t the only thing on the minds of those transitioning from the workforce into retirement. There are many complicated feelings and anxieties when approaching a new phase of life which can skew rational decision making. To better understand the role psychology plays in retirement planning — and considerations for advisors — view our helpful guide, The Psychological Impact of Retirement.

The Psychological Impact of Retirement


1Social Security Administration, When to Start Receiving Retirement Benefits, January 2020
2Bureau of Labor Statistics, Consumer Expenditure Survey, 2019, September 2020
3Social Security Administration, Fact Sheet, June 2020


Topics: Client Relationships