The Only Way to Help Clients Enjoy Retirement

Generic number-crunching won’t calm clients’ concerns and could ruin their retirement. Here’s the process you need.

By Frank Smith

Do I have enough to retire? How much can I take out each month? How long will my money last? If your experience is like mine, these are some of the leading questions clients ask as they approach retirement.

This article seeks to show how we can calm those concerns and help our clients enjoy retirement. We’ll briefly describe the landmark safe withdrawal study conducted in 1994 by William P. Bengen, consider potential pitfalls in applying it in the early stages of retirement planning, and offer a client centered process you can follow when developing a financial strategy for your newly retired or about-to-retire clients.

Safe Withdrawal Rate

In his study, Mr. Bengen sought to determine how much money new retirees could take from their investments each year without exhausting their investment portfolio. The study used the actual performance of equity and fixed income securities over a 50-year period from 1926 to 1976. It applied various starting annual withdrawal rates, with subsequent adjustments for inflation, over 30-year periods.

Bengen examined how long an investment portfolio may last given various starting withdrawal rates and concluded that a new retiree could safely take an initial withdrawal of 4% from their portfolio and expect, based on historical performance, that their portfolio should last 30 or more years. The legend of the safe withdrawal rate of 4% was born!

Additional studies by Bengen — who has since revised his figures a couple of times  — and others furthered that research to include issues such as additional asset classes for investments, guardrails on withdrawals based upon financial market conditions, and tax-efficient distribution planning. Those strategies, while thought-provoking, may not reflect the unique needs of each client.

Potential Pitfalls

Let’s consider Mr. Penny, a fictional financial professional, who meets equally fictional clients Mr. and Mrs. Savers. The Savers plan to retire shortly and want to discuss how that decision may affect their financial situation. Penny begins his retirement planning process by meeting with the Savers to gather information so he can develop an investment profile of them.

Using that information, Penny applies the safe withdrawal rate and variations of it to construct a series of tables and charts to show the Savers how long their money might last under various withdrawal scenarios.

Penny tells the Savers they could safely withdraw $40,000 the first year and increase it each year by the rate of annual inflation in the future. Furthermore, he concludes that there would be a high probability that their investments would last 30 years or more. Penny has done an excellent job of generating data, but it may not be useful information for his clients.

Why not? His analysis only answers whether investments should last 30 years based on an arbitrary starting payout rate. It says nothing of whether the payout is sufficient for the Savers needs — more than they require.

The problem is that the Savers need to withdraw $70,000 from their investments in the first year of their retirement to make ends meet. The long-term analysis prepared by Penny may be interesting from an academic viewpoint but it neglected a basic principal: It’s hard to get to the long term if you can’t make it through the short term.

Additional Limitations

Other foreseeable developments could also diminish the usefulness of Penny’s analysis. For example, the Savers may intend to take advantage of their current good health to travel extensively early in retirement before settling into a more modest lifestyle. They may plan to pay for the education of their children or grandchildren in the coming years, intend to make major home improvements, or make other large expenditures.

On the other hand, suppose the Savers expect to withdraw only $5,000 from their investments in the first year of retirement. Perhaps their cash flow will improve in several years because they are waiting until they reach 70 before applying for Social Security. Or they may own deferred annuities that begin making payments when the Savers reach 70, 75 or 80 years old. The Savers could also anticipate receiving a large inheritance in the next few years.

There are a myriad of events for which the Savers may be planning. Any one of them could significantly impact their annual cash flow needs. Unfortunately, Penny’s analysis and forecast of systematic annual withdrawals might not capture those events.

Retirement calculators may also fall short of providing useful information to their users. In some cases, calculators ask the user to provide a minimal amount of information with which it may calculate the number of years an investment portfolio is expected to last in retirement.

Unfortunately, calculators typically rely on information from a single point in time and may not reflect dynamic changes such as portfolio composition, spending patterns, or large additions or withdrawals from the investment portfolio.

A Client-Centered Process

So how might we approach retirement planning that truly reflects the unique needs of our clients?

After your client has committed to working with you, I suggest you request from your client a comprehensive list of their current and anticipated cash-flow items, including any large changes in their income or expenses, for as many years in the future as possible. In addition, request copies of their latest financial accounts to understand what they currently own in their investment portfolio.

While copies of investment statements are usually received quickly, I’ve found that clients may drag their feet when asked to generate a list of their income and expenses. To move the process along, I provide my clients with worksheets that include an extensive list of expenses they may currently incur, their anticipated sources of income in retirement, and any large expenses or sources of income they expect in the future.

I direct them to fill in the monthly, semi-annual or annual amount for each expense by reviewing at least six months of their credit card bills, bank and brokerage statements, checking and savings accounts, and any other source they use to make financial transactions. This information is a critical input to the retirement planning process.

Practical Calculations

Next, use the cash-flow and investment-portfolio data you receive to prepare inflation-adjusted estimates of how much money your client may require annually for several years in retirement. While there are many thoughts on how much a person will need in retirement versus pre-retirement, I’ve found that new expenses tend to crop up in retirement and replace expenses that decline after a client stops working. Therefore, I use the pre-retirement expense amounts as the starting point of how much a client’s spending will be in retirement.

With that analysis complete, you’ll be able to answer the important practical question of how much a client will need to withdraw annually from their investments rather than the theoretical question of how much they can withdraw.

It’s now time to meet with your client to collect information you typically need to develop an accurate understanding of their investment profile. You might also solicit input from your client’s tax professional so that withdrawals may be made in a tax efficient manner.

Matching Assets with Liabilities

By following these steps, the process of constructing an investment portfolio for your client will start to fall into place. Begin by matching your client’s expected annual cash-flow needs using individual fixed-income securities in much the same way that insurance companies apply asset-liability matching techniques. Matching assets with liabilities could extend for five or more years of your client’s retirement, depending on their tolerance for risk.

For example, if the analysis suggests your client will need $50,000 from their financial assets in each of the first five years of retirement, consider investing $50,000 par value or more in good quality fixed-income securities, including zero coupon U.S. Treasurys, that mature in each of those years to meet those withdrawals. The composition of remaining investable assets could then be constructed to reflect the investment profile you previously created.

A New Starting Line

As a financial planner, completing the retirement plan isn’t the finish line; it’s actually a new starting line. After all, unanticipated changes in your clients‘ financial needs are likely to require changes in their retirement plans.

Encourage clients to contact you if their lifestyle or financial conditions change and reach out to them at least annually for an update on their situation and to learn how the retirement plan you implemented is working for them.

With a financial plan in place that reflects the unique needs of each of your clients, they can stop worrying (we hope) and start enjoying retirement!


With so many new retirees each year, there is a great need for quality retirement planning services. However, many of the challenges our clients face in retirement are different from those in the accumulation phase of their lives. It is important that financial advisors are well versed in retirement issues and methods to address them so that the unique needs of our clients can be best served.

Frank Smith, CFA, RICP, MBA, is fiercely proud of the personal and award-winning investment advisory services he provides to clients who are retired, near retirement or building their wealth. He draws on 40 years of experience and continuous training as an analyst and portfolio manager. Frank has been named “Best Investment Advisory Service Provider-Northeast USA,” “Five Star Wealth Manager,” and “Best Investment Firm.” He can be reached at 215-321-6663, or

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