Practice Management September 6, 2018

Retirement Planning for Business Owner Clients

Many small business owners have only planned for the future insofar as deciding that they will ultimately sell their firms and use the proceeds to finance their retirement; they need expert help from advisers, and so do their employees.
Reported by

Looking across research on retirement planning, it is easy to notice a theme that emerges time and again—many individuals underestimate the amount of savings they’ll need to retire comfortably.

As a result, financial advisers have an opportunity to enhance the lives of their clients, and in many instances, the lives of their clients’ employees, by incorporating retirement planning services and plan sponsor guidance into their business models. By offering a holistic approach to financial planning, advisers will be positioned to help business owners more effectively plan for their own financial futures and empower employees to do the same.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

One of the key components of being an effective adviser in the retirement planning space is understanding and addressing misconceptions often held by business owners. For example, many small business owners have only planned for the future insofar as deciding that they will ultimately sell their firms and use the proceeds to finance their retirement. However, the amount of income gained from selling a business is far from guaranteed, which creates an opportunity for advisers to help clients diversify their retirement strategies for long-term security. By having a frank conversation about a client’s retirement plan and demonstrating the value of a market-based and risk-conscious approach, advisers can help their clients avoid the potential repercussions of putting all their eggs in one proverbial basket.

Small Business Employees Need Help, Too

Small business owners may also hold misconceptions when it comes to employee retirement benefits. While some may believe they don’t have the resources to offer a retirement plan for their business, advancements in technology and the support of third parties can simplify the process of implementing a comprehensive retirement plan. The 401(k) space is rife with intuitive, web-based technology that can streamline and automate plan management, especially when it comes to straightforward profit sharing or deferred compensation plans. At the same time, this automation can reduce the risk of data entry errors and other inefficiencies that can stem from manual plan administration.

The process of implementing an employee retirement plan doesn’t have to be prohibitively costly for small business owners. Employees will be contributing to their own retirement funds, and even plans that do not offer employer matching financially benefit staff through pre-tax savings.

Firms that do have the capability to offer matching programs can also reap the benefits of these very same pre-tax incentives. Moreover, employers should consider providing a company-wide retirement plan as a strategic investment in the firm’s productivity and bottom line, given that offering competitive employee benefits can be a crucial differentiator when it comes to attracting and retaining top talent. 

Advisers Drive Implementation

After helping small business owners understand why retirement planning is necessary for both themselves and their employees comes actual implementation. More novice financial advisers may feel hesitant about branching out into this area for the first time, but there are many third-party resources available to streamline plan design, due diligence measures, recordkeeping and more. With this support, many advisers will come to find that their expertise can be applied fairly consistently across a wide range of industries, and that they’re well-equipped to advise many types of small businesses on retirement planning.

Building out a retirement planning service has clear benefits for small plan sponsors, their employees, and advisers alike. With the right partners and support, financial advisers can become a trusted guide for every aspect of their clients’ lives and help communities better prepare for financial success at each stage of life’s journey.

*Note from the editor

Cathy Clauson is senior vice president of retirement solutions at AssetMark, Inc. AssetMark Retirement Services is a division of AssetMark, Inc., an SEC-registered investment adviser.

This feature is intended to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Asset International, Strategic Insight or its affiliates.

Client Service September 5, 2018

How to Organize Sustainable Retirement Distributions

Each individual’s retirement income plan should be tailored specifically to their needs by coordinating DC plan distributions with decisions about when to take Social Security.
Reported by

When saving and investing money for the long-term future, the saying “don’t put all of your eggs in one basket” is commonly used.

This mantra holds true whether an individual is accumulating assets for retirement or planning how to efficiently distribute those assets in retirement. Essentially, individuals need to be able to diversify their portfolio because it is nearly impossible to predict what sector or asset class will be the next leader or laggard.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

While income diversification in retirement is similar to investment diversification during working and saving years, there are some differences. A prudent investor will formulate a strategy that protects their income and ensures market fluctuations have little impact on their standard of living. Identifying the specific purpose for each investment one owns, or intends to make, is a wise first step.

The Bucket Approach

To help folks plan for sustainable retirement distributions, one option is a bucket approach. Typically, this will entail setting out several buckets, as follows: Short-Term Income, Long-Term Income, Long-Term Growth, and Protection.

This allows the individual to compartmentalize investments for various phases of retirement and thereby make investment decisions with purpose. Ultimately, the soon-to-be retiree can make informed and confident investment decisions because they have identified the often overlooked investment aspects of risk appetite and time horizon. 

Each person’s case should be tailored specifically to them by coordinating future distributions along with decisions about when to take Social Security—and which pension payout option to elect. Financial professionals can be a big help to individuals throughout this process.

The Short-Term Income Bucket

There should be little, if any, risk in the Short-Term Income Bucket. Ideally, the individual will be able to set this bucket up late in the accumulation phase. This bucket is going to provide income for the first few years of the distribution phase.  

There are several choices for allocating assets in the short-term income bucket. One could allocate this bucket to cash, or by laddering certificates of deposit, laddering individual bonds, or laddering fixed annuities. Other options include a single premium immediate annuity, an indexed annuity with short-term payout periods, or a combination of these.

The Long-Term Income Bucket

One’s Long-Term Income Bucket will pick up where the Short-Term Income Bucket leaves off. Generally, investors should be willing to take on a little bit of risk in this bucket because the investment horizon is longer than the Short-Term Income Bucket.

Again, there are numerous investment choices when allocating to this bucket. Some of the choices are the same as in the Short-Term Income Bucket, but here one can also use annuities with income riders. These work similar to a pension benefit; they pay the individual (and potentially the spouse) an income stream in the future that cannot be outlived. These income riders are packaged in a lot of different “flavors.” If this is something of interest, individuals should make sure to know exactly what they’re getting, the cost, and restrictions they face.

The Long-Term Growth Bucket

The Long-Term Growth Bucket should be considered to have an open-ended investment horizon. This bucket is established to help guard against inflation, unforeseen needs, or additional wants. Because the individual sets aside enough money in the other buckets to take care of basic living expenses, this bucket is meant to be truly liquid. 

Assuming the investor is comfortable with the risk, it is generally suggested to take an aggressive investment allocation within this bucket, again because the investment horizon is long, and withdrawals will likely be intermittent and relatively small. Since distributions from this bucket will likely not stress this bucket in down markets, investing aggressively usually is not uncomfortable. Individuals should aim to diversify this bucket across all economic sectors based on market trends and reevaluate the investments monthly.

Conclusions

One bucket not covered above is the Protection Bucket. Individuals can use this bucket to protect against pre-mature death, loss of Social Security income when the first spouse passes away, and long-term health care expenses. Mitigating these risks can get much more complex in planning. Unfortunately, some folks simply cannot afford to mitigate these risks as much as they would like.

It is important to understand there are so many variables that can affect the percentage of retirement assets devoted to each bucket; income needs, coordination between nest egg distributions and other income sources, and assumed rates of return, to name a few. There is no “one size fits all.” The virtues of diversification are ultimately rooted in mitigating risk. By utilizing a bucket approach, investors can properly diversify their nest egg to achieve sustainable income in retirement, and control their risk.

*Note from the editor

Ben Harvey is the President of Pathway Financial Planning, a financial planning firm based in Connersville, Indiana, and Oxford, Ohio. He is an investment adviser representative of, and securities and advisory services are offered through, USA Financial Securities Corp., Member FINRA/SIPC. 

This feature is intended to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Asset International, Strategic Insight or its affiliates.

«