section 1 - The American College Online Learning Center

(9) In addition to inflation and longevity risk, they want products and strategiesto protect against the other risks discussed in the prior section of thiscourse.(10)Example: Sam and Diane come to their planner to discuss an approach toproviding an inflation and longevity protected stream of income that whencombined with Social Security will help them to maintain a comfortablelifestyle and handle the myriad risks they may encounter.c. The research indicates that the overwhelming majority of surveyed advisors (over78 percent) first select an approach to provide retirement income, and then selectand manage the products needed to implement the approach—rather than using aproduct with an embedded strategy.d. There are three prevalent approaches used in the current retirement incomeplanning environment:(1) The structured systematic withdrawal approach(2) The time-based segmentation approach (also known as the “bucketapproach” or the “age-banded” approach)(3) The essential-versus-discretionary approach (also known as flooring)(4) Planning Point: A combination of these approaches is also a distinctpossibility.2. The structured systematic withdrawal approacha. The Financial Planning Association (FPA) defines the systematic withdrawalapproach like this:(1) Diversify investments based on the client’s risk profile and manage thetotal return of the client’s entire portfolio. To provide income, withdraweither a predetermined or policy-based amount funded by a combination ofinterest, dividends, and/or portfolio holdings based on the client’s incomeneeds and economic conditions.b. The majority of surveyed financial advisors use the systematic withdrawalapproach and in 2011 recommended on average a 4.17 percent initial sustainablewithdrawal amount (discussed later). This dropped from 4.75 percent in theprevious year.c. Example: Rachel and Ross have $1,000,000 saved for their retirement. In thefirst year of retirement the planner using the structured systematic withdrawalapproach recommends that they consume $41,700 of their portfolio and combinethis with their Social Security checks to pay for expenses.3. The time-based segmentation approach (also known as the “bucket approach” or the“age-banded” approach)a. The FPA defines the time-based segmentation approach as follows:(1) Set up separate pools of investments with lowest risk investments in thenear-term time horizon “segment,” somewhat higher risk investments in thenext segment, and riskiest portfolio in the longest-term segment. Income isdrawn from one segment at a time. Once the first segment is depleted,assets from the second segment are used for income.b. About 38 percent of surveyed advisors frequently use or always use the so-calledbucket strategy.6.2